During the recent national recession, millions of Americans found that they had credit card bills they could no longer afford to pay because of personal financial hardships, and that in turn led to legislation designed to better protect consumers.
While the Credit Card Accountability, Responsibility and Disclosure Act of 2009 had a positive effect for many borrowers across the country, in the end, it seems to have also helped the nation's largest lenders, according to a report from Businessweek. Credit card defaults and balances were rising significantly between 2007 and into 2009, but once the recession hit and was met with the Credit CARD Act, lending standards began to tighten significantly.
During the downturn, millions saw their credit card balances written off as uncollectable because of three months or more of repeated missed payments, the report said. Often, this was the result of financial distress outside of borrowers' control, usually brought on by complications such as job loss or underemployment, but nonetheless, issuers were writing off nearly $800 million in bad credit card debt every month as the delinquency rate on those accounts soared to nearly 7 percent across the lending industry.
However, the Credit CARD Act put in place a number of regulations that, while they proved unpopular in the lending industry, had numerous positive effects for both borrowers and card issuers, the report said. Within just a few quarters of the law's passage, the delinquency rate began to slump, and with it went the amount lenders had to write off as being uncollectable after about two years of increases.
Essentially, experts and even critics of the bill within the lending industry, say that the law was successful because it forced card issuers to be responsible about who was extended credit, the report said. While it increased protections for borrowers by outlawing certain hidden fees, preventing lenders from changing interest rates, and limiting penalties for missing payments, it also forced card issuers to significantly tighten their credit issuing standards, which directly contributed to a sizable decline in charge offs.
"If there is a silver lining to the CARD Act – I'm not here to say the CARD Act was good for our business, so nobody misunderstand the comment – but if there were a silver lining to it, it forced rationality," Marc Graf, the chief financial officer for Discover Financial Services, one of the nation's largest lenders and payment processors, told attendees at a recent industry conference, according to the news service.
Prior to the recession, lenders gave millions of consumers with low and even subprime credit ratings financing in an attempt to drive profits through fees and interest rates, the report said. They did so because, even as lending to riskier borrowers increased, they buoyed their bottom lines by changing the terms of consumers' accounts to make them more profitable. Graf told conference attendees that this practice was, "a silly race to the bottom."
New lending practices positive for all involved
But the downturn and subsequent legislation forced that "rationality" and almost immediately enjoyed fewer instances of delinquency and default as a consequence, the report said. Now, the practice of offering low rates and fees as teasers to lure in new customers and then changing those terms is outlawed, and everyone is benefiting.
Currently, charge offs are at the lowest point observed since 2006, the report said. The most recent monthly statistics, issued for May, show that lenders wrote off $276 million in outstanding balances as being uncollectable, down from the August 2009 pinnacle of $821 million. This has come despite the nationwide unemployment rate, which used to move more or less in concert with delinquency and default, hovering stubbornly high even as instances of late payments become scarcer. Now, the nationwide delinquency rate (balances 30 days or more behind on payments not yet considered uncollectable) stands at about 3 percent of all accounts. At the close of 2006, prior to the end of the recession, that figure was closer to 4 percent.
However, many experts have been predicting for some time now that the nationwide delinquency and default rates on credit cards would have to increase at a point in the near future. Lenders have slowly broadened lending standards once again as the effects of the recession recede, and experts believe that this will logically lead to increased late payments, which should trend back to historical norms.
If you're looking to improve your credit score, perhaps the easiest way to do so is by making all payments on time and in full, and taking steps to reduce your outstanding balances. However, you should also take the time to check your credit report for any unfair markings that might be inadvertently reducing your standing.