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Oren Bar-Gill & Ryan Bubb, Credit Card Pricing: The CARD Act and Beyond, 97 Cornell L. Rev. 967 (2012).

Abstract: We take a fresh look at the concerns about credit card pricing and empirically investigate whether the Credit CARD Act of 2009 (the CARD Act) has been successful in addressing those concerns. The rational choice theory of credit card pricing, which posits that issuers use back-end fees to adjust the price of credit to reflect new information about borrowers’ credit risk, predicts that issuers will respond to the CARD Act by using alternative ways to price risk. In contrast, the behavioral economics theory, which posits that issuers use back-end fees because they are not salient to consumers, predicts that issuers will respond by increasing unregulated nonsalient prices. If the market is competitive, we argue that the CARD Act should also result in increases in some salient, up-front prices. But we show that if issuers have market power, reductions in nonsalient fees may not result in concomitant increases in salient charges. We test these predictions using two datasets on credit card contract terms before and after the CARD Act rules went into effect. We find that the rules have substantially reduced the back-end fees directly regulated by the CARD Act, including late fees and over-the-limit fees. However, unregulated contract terms, such as annual fees and purchase interest rates, have changed little. Post–CARD Act, consumers continue to face high long-term prices and low short-term prices, and imperfectly rational consumers still have difficulty understanding the cost of credit card borrowing. We thus consider potential improvements to the regulatory framework. We argue that improved disclosures that provide consumers with the aggregate cost of credit under the contract, based on information about the borrower’s likely use of credit, would improve consumer outcomes. Furthermore, we suggest that regulators should not focus only on prices that are “too high” but should also consider limiting the ability of issuers to charge introductory teaser interest rates that are, in a sense, “too low.”