A new study shows the effects of the CARD Act and better informed consumers in falling penalty revenues. The study shows that consumers paid only $17.8 billion in penalty fees in 2012, down from $19.4 billion in 2011, an 8% decrease.
Analysts watch the R.K. Hammer Card Penalty Fee Index as a way to see how penalties and fees affect consumer finance companies. The Index has fallen for three years in a row, ever since the CARD Act was passed in May 2009. The CARD Act significantly reduced the fees that could be charged to consumers as well as limiting the fees that consumers paid for various problematic occurrences. For example, the fee for an over-the-limit charge was essentially outlawed as customers have to agree to the charge.
Penalty revenue is a large source of revenues for credit card companies. Whereas interest fees are based on the cardholder's balances, a penalty fee is independent of the total balance. Thus, a late payment on a $10 balance could trigger a fee as costly as $35, which is an effective interest charge of more than 350% just for paying the account late.
Some of the decline in fee revenue is likely coming from more informed credit card customers. The industry reports that customers are much less likely to carry a balance, and more likely to pay their bills on time and in full. The 2009 CARD Act also required companies to show customers how much it would cost to carry balances and pay only the minimum payment. This disclosure has undoubtedly led to better informed customers who are more eager to pay off their credit cards.