Mt. Vernon Register-News


October 10, 2013

Small changes have a big impact on people's lives


It is easy to be skeptical about disclosure requirements of this kind. Will consumers pay any attention? It turns out that many of them do so. Sumit Agarwal of the National University of Singapore (along with co-authors from the University of Chicago, New York University and the U.S. Treasury Department) finds that the consequence of the nudge was to reduce interest payments by $74 million a year.

In the scheme of things, that isn’t a huge amount of money. For the 3 million or so borrowers who changed their behavior, the annual savings were only about $24 each. But the example demonstrates that disclosure requirements can have real effects.

And Agarwal and his co-authors have much better news.

The CARD Act contains a series of seemingly modest provisions designed to limit credit-card fees. For example, companies are forbidden to impose fees on cardholders who go over their credit limit unless the cardholders agree to “opt in” to authorize that practice.

In addition, banks must give cardholders a 45-day advance notice of rate increases, and they must inform cardholders of their right to cancel the account before such increases go into effect. Late fees are generally capped at $25 a month, and no such fee can exceed the minimum payment. Cardholders must also be provided with statements that inform them exactly how long it would take to pay the outstanding balance if they made only the minimum monthly payments.

What is the effect of these provisions? The answer is that they have produced substantial decreases in both over-limit fees and late fees — thus saving U.S. credit-card users no less than $20.8 billion annually. Notably, cardholders with low credit scores appear to be the biggest beneficiaries.

At this point, every economist will emphasize that there is no such thing as a free lunch. We might speculate that while some consumers are benefiting from the fee limits, others are picking up the tab, perhaps through increases in interest rates, or perhaps by decreases in the availability of credit cards.

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