5 Signs That Credit Card Reform Is Really Working

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In 2009, the Credit Card Accountability, Responsibility, and Disclosure Act became law. The law's intent was to set limits on certain fees that credit-card issuers charged their customers and to make it clearer to cardholders what they needed to do in order to avoid other fees.

Most of the provisions of the CARD Act went into effect in 2010. Now, three years after the law's implementation, the Consumer Financial Protection Bureau has come out with a report evaluating the successes and failures of the CARD Act in relation to credit-card customers. Here are five signs that the law has helped achieve its goals.

1. Credit-Card Customers Are Paying Less in Over-the-Limit Fees.

Most credit cards impose a fee if you make charges above your credit limit. For customers who routinely stay nearly maxed out on their credit cards, staying below those limits can be a challenge.

The CFPB report found that over-the-limit fees have become much rarer under the new law. During the fourth quarter of 2008 before the law's implementation, 16.4 percent of accounts were over their credit limit at some point, and card companies imposed over-the-limit fees almost half the time. By the fourth quarter of 2012, over-the-limit situations affected 12.7 percent of accounts, but card companies almost never imposed fees when that happened -- only 3.4 percent of the time.

2. Late-Payment Fees Have Gotten Smaller.

Credit-card companies also routinely charge fees if you're late in making a payment on your account. In 2008, the average amount charged for late-payment fees was more than $33.

In the aftermath of the CARD Act, late-payment fees dropped markedly to just over $23 in 2010. Since then, fees have crept up again, approaching $27 by late 2012. Also, the percentage of accounts incurring late fees has dropped by three to four percentage points, falling to 22.2 percent in 2012.

3. Fewer Young Adults Are Getting Credit Cards.

One big danger that the CARD Act sought to address was the incidence of adults age 18 to 20 obtaining credit cards without any income to support payments. As a result, many young adults got deeply into debt even before they began their careers, digging financial holes that were understandably difficult to climb out of.

%VIRTUAL-article-sponsoredlinks%The CFPB reports that the number of new cards issued to customers between 18 and 20 has fallen by more than half over the past five years. Only 14.4 percent of young adults had opened a credit-card account in 2012, down from 33.6 percent in 2007. The reductions can largely be traced to the requirement that card applicants under 21 either show proof of adequate income to cover their own payments or obtain a cosigner.

4. Credit Card Agreements Are Getting Easier to Read.

If you've ever tried to read the fine print of a credit-card agreement, you already know how long and complicated they are. The CARD Act sought to make credit disclosures shorter and easier to understand, providing realistic examples that would show the impact of certain decisions on how much customers would pay for their credit.

It worked. The CFPB found that on average, credit-card agreements have gotten substantially shorter -- by almost 25 percent. In addition, the CFPB found that the agreements also used language that was easier to understand, making their terms more readable.

5. Total Cost of Credit Has Fallen.

Overall, the CFPB found that the amount that cardholders pay for credit on their card accounts fell by almost two full percentage points between 2008 and 2012, from 16.4 percent to 14.4 percent. The CARD Act can't claim to be the sole cause of that phenomenon, but in light of the fee reductions that have resulted from its enactment, the law deserves at least some of the credit.

Be Smart About Credit

Even with the CARD Act's success, you still have to be careful in managing and tracking your credit-card accounts to avoid fees. With issuing banks still looking for ways to make money from their cards, you should stay vigilant to make sure you don't fall into any unexpected fee traps.

Why Your Bank Thinks Someone Stole Your Credit Card
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5 Signs That Credit Card Reform Is Really Working

One reason why Marquis' gas purchases might have triggered a fraud lockdown? Filling their tank is a common first move for credit card thieves.

"Some of the things they look at are small-dollar transactions at gas stations, followed by an attempt to make a larger purchase," explains Adam Levin of Identity Theft 911.

The idea is that thieves want to confirm that the card actually works before going on a buying spree, so they'll make a small purchase that wouldn't catch the attention of the cardholder. Popular methods include buying gas or making a small donation to charity, so banks have started scrutinizing those transactions.

Of course, it's not a simple matter of buying gas or giving to charity -- if those tasks triggered alerts constantly, no one would do either with a credit card. But Levin points to another possible explanation: Purchases made in a high-crime area are going to be held to a higher standard by the bank.

"It's almost a form of redlining," he says. "If there are certain [neighborhoods] where they've experienced an enormous amount of fraud, then anytime they see a transaction in the neighborhood, it sends an alert."

(Indeed, Erin tells me that one of the gas purchases that triggered an alert took place in a rough part of Detroit, which she visited specifically for the cheap gas.)

People who steal credit cards and credit card numbers usually aren't doing it so they can outfit their home with electronics and appliances. They don't want the actual products they're fraudulently buying; they're just in it to make money. So banks are always on the lookout for purchases of items that can easily be re-sold.

"Anytime a product can be turned around quickly for cash value, those are going to be the items that you would probably assume that, if you were a thief, you would want to get to first," says Karisse Hendrick of the Merchant Risk Council, which helps online merchants cut down on fraud. Levin says electronics are common choices for fraudsters, as are precious metals and jewelry.

Many thieves don't want to go through the rigmarole of buying laptops and jewelry, then selling them online or at pawnshops. They'd much prefer to just turn your stolen card directly into cold, hard cash.

There are a few ways that they can do that, and all of them will raise red flags at your bank or credit union. Using a credit card to buy a pricey gift card or load a bunch of money on a prepaid debit card is a fast way to attract the suspicions of your credit card issuer. Levin adds that some identity thieves also use stolen or cloned credit cards to buy chips at a casino, which they can then cash out (or, if they're feeling lucky, gamble away).

When assessing whether a purchase might be fraudulent, banks aren't just looking at what you bought and where you bought it. They're also asking if it's something you usually buy.

"The issuers know the buying patterns of a cardholder," says Hendrick. "They know the typical dollar amount of transaction and the type of purchase they put on a credit card."

Your bank sees a fairly high percentage of your purchases, so it knows if one is out of character for you. A thrifty individual who suddenly drops $500 on designer clothes should expect to get a call -- or have to make one when the bank flags the transaction. If you rarely travel and your card is suddenly used to purchase a flight to Europe, that's going to raise some red flags.

Speaking of Europe, the other big factor in banks' risk equations is whether you're making a purchase in a new area. I bought a computer just days after moving from Boston to New York, and had to confirm to the bank that I was indeed trying to make the purchase. Levin likewise says that making purchases in two different cities over a short period of time raises suspicions.

"I go from New York to California a lot, and invariably someone will call me [from the bank], " he says. Since one person can't go shopping in New York and California at the same time, any time a bank sees multiple purchases in multiple locations in a short period, it's going to be suspicious.


You can follow Motley Fool contributor Dan Caplinger on Twitter@DanCaplinger or on Google+.
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