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The new CARD Act has brought many benefits for consumers, however, we may also have taken a step back in the process. These are the key findings of a recently released study on the aftermath of the Credit CARD Act, aptly titled “Two Steps Forward,” by the Pew Charitable Trust Safe Credit Card Project.
The study analyzed the benefits—and the drawbacks—of the new credit card era. It was based on a review of nearly 450 credit card applications for consumer credit cards offered online by the largest 12 bank and 12 largest credit union card issuers in the U.S.
On the bright side, the study finds, consumers are enjoying many of the protections Congress sought to implement: freedom from retroactive rate-hikes or arbitrary APR increases and protection against over-the-limit fees. Cardholders are also benefitting from the new rules that stipulate that any portion of payments above the minimum must be applied to the balance with the highest APR, saving consumers who pay more than the minimum considerable amounts in interest charges.
However, while many things have changed for the better, some have not. Nine out of ten banks in the study and almost one in two credit unions continue to feature steep penalty rates. Furthermore, the penalty rates have increased to as much as 29.99 percent for most major card issuers. While Congress mandated that such penalties remain “reasonable and proportional,” the Fed has done little to set rules ensuring this, or even defining what it means. The Fed left the door open for card issuers to levy penalty rates, instantly and retroactively, on promotional balances, such as 0 APR balance transfer. The upshot of this has been that most card issuers reserve the right to introduce penalty APRs on promotional balances, if a cardholder has as little as one late payment.
Moreover, Pew researchers found that nearly half of all issuers refused to disclose their penalty rates; a strategy that allows them to change the numbers when they see fit, as opposed to maintaining a standard rate. Issuers also evaded revealing the specifics of what cardholder actions would trigger rate increases, or how cardholders might be able to bring a penalty APR back down to normal levels.
Consequently, despite the new legislation, cardholders are still at the mercy of their issuer when it comes to what triggers a penalty rate, how high the rate is, and what it takes—if anything can be done—to reduce it. Consumer advocates express concern over these new, evasive policies, suggesting that they not only undermine the greater transparency the CARD Act sought to establish, but longstanding bank regulations requiring the disclosure of crucial pricing terms as well.
Penalty rates aren’t the only rates that have risen since the implementation of the CARD Act: purchase APRs are up as are cash advance and balance transfer fees. On the bright side, however, the onslaught of additional fees that some predicted has not materialized. When the CARD Act was signed into place, many experts projected that more issuers would begin to levy annual fees alongside inactivity fees and other new charges. However, the number of cards with annual fees has actually decreased slightly to 14 percent of cards this year compared to 15 percent last year. For the cards that do feature annual fees, however, there has been an upward trend, from an average of $50 to $59 for bank credit cards and $15 to $25 for credit union issued cards.
Researchers also found that not only has the legislation put a damper on over-the-limit fees, but many credit card issuers themselves have begun to do away with the charge altogether. Less than one in four cards (down from four out of five) included in the study carried an over-the-limit fee.
Overall, the study concludes, the changes brought in by 2009’s CARD Act have propelled the credit card industry “two steps forward.” The specific terms that make up the implied “one step back,” however, are something that consumers will want to remain watchful for.
