While the Credit CARD Act provided a number of protections for average consumers from predatory lending tactics, it also forced many financial institutions to stop granting lines of credit to those who had subprime credit scores or incomes, according to a report in the Wall Street Journal. As a result, they were forced to seek other types of credit, including payday loans, which can be more troublesome than credit card debt.
The new rules set forth by the laws caused many institutions to increase lending standards to better protect themselves from losses to delinquent and defaulted credit card debt, the report said. In addition, many also opted to slash credit limits for existing customers, resulting in over $1 trillion in potential credit being eliminated since the start of the recession. Further, they dropped some riskier borrowers – particularly those with low incomes who were more likely to default on their credit card debt – altogether, barring them from additional credit.
As a result of being dropped, combined with the more stringent policies lenders began enforcing, many low-income or subprime consumers were locked out of the credit system entirely, the report said. But they still needed lines of credit, even if they couldn't take on additional credit card debt. This in turn led them to seek payday lenders and other potentially dangerous financial products.
In addition, many banks have also seen their profits tumble as a result of the Durbin Amendment to the Dodd-Frank Act, meaning that they've cut other programs to help close gaps caused by the shortfalls, the report said. These programs include those that were popular among low-income consumers, such as free checking accounts. Instead, subprime borrowers have discontinued their normal use of these institutions, leading many to be under- or entirely unbanked, and putting themselves on more dangerous financial ground.
Many subprime consumers have not been able to open accounts that allow them to take on credit card debt for a number of months. This can lead to money problems and debt concerns because they may not have enough to meet their basic needs.