The 2009 Credit CARD Act reduced overall borrowing costs to consumers by an annualized 2.8% of average daily balances, with a decline of more than 10% to consumers with the lowest FICO scores, resulting in a total savings to consumers of $20.8 billion per year, say University of Chicago Booth School of Business Assistant Professor of Economics Neale Mahoney and NYU Stern Assistant Professor of Finance Johannes Stroebel, together with their co-authors Sumit Agarwal (National University of Singapore) and Souphala Chomsisengphet (Office of the Comptroller of the Currency) in their new paper, “Regulating Consumer Financial Products: Evidence From Credit Cards.” The paper has been posted as National Bureau of Economic Research (NBER) Working Paper No. 19484.
These cost reductions were achieved through regulating the frequency and magnitude of late fees and over-limit fees. The researchers found no evidence that banks offset these savings by increasing interest charges or reducing access to credit, challenging the argument that banks would find other ways to pass the costs of the credit card regulation on to consumers.
The researchers also found a 0.5% increase in the number of people paying a monthly amount that would allow them to pay off their credit card balances in 36 months, likely as a result of the CARD Act’s requirement to prominently display the cost of balance repayment when making only minimum monthly payments vs. repaying the current balance within 36 months.
This research provides guidance for future consumer finance regulations by suggesting that:
1) Banks do not necessarily pass on the cost of regulations to consumers in other ways
2) Greater transparency in borrowing costs can affect repayment behavior and help consumers make better financial decisions.
To speak with Professor Johannes Stroebel or Professor Neale Mahoney, please contact them directly, or contact Joanne Hvala (212.998.0995) or Anna Christensen (212.998.0561) in NYU Stern’s Office of Public Affairs