Dodging Reform: As Some Credit Card Abuses are Outlawed, New Ones Proliferate

32 Pages Posted: 4 Feb 2012

Date Written: December 10, 2009


Faced with pending and proposed reforms in the form of the Credit CARD Act designed to protect consumers from a series of unfair charges, credit card issuers have established or expanded the use of at least eight hidden charges across more than four hundred million accounts. The pricing strategies discussed in this paper all appear to be primarily designed to take advantage of inattention, lack of knowledge, and documented behavioral biases exhibited by consumers. An increasing number of issuers have adopted a practice we have identified as “pick-a-rate,” where an issuer manipulates the variable rate index used with 117 million accounts currently affected. Hidden “pick-a-rate” pricing charges consumers APRs 0.3 percentage points higher on average than traditional pricing and results in a total cost to consumers of $720 million per year. Other rate-maximizing practices discussed that increase costs for cardholders include minimum finance charges and variable rate floors. Issuers have manipulated penalty fee structures to charge almost everyone (87 percent) the highest penalty fee possible, while taking advantage of cognitive limits to project the appearance of charging lower fees. Issuers are padding their other miscellaneous fees since the announcement of new Federal Reserve rules and passage of the Credit CARD Act and have disguised many of these charges. Fee changes include: adding inactivity fees, expanding the definition of an international transaction, and raising consumer costs by changing cash advance/balance transfer floors, ceilings, and related charges.

Suggested Citation

Frank, Joshua Mayer, Dodging Reform: As Some Credit Card Abuses are Outlawed, New Ones Proliferate (December 10, 2009). Available at SSRN: or

Joshua Mayer Frank (Contact Author)

Center for Responsible Lending ( email )

302 West Main St.
Durham, NC 27701
United States
9193138525 (Phone)
919-313-8592 (Fax)


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