The credit card industry got its report card this week, and the results were dismal. According to a study conducted as part of Pew Charitable Trust’s Safe Credit Cards Project, despite Congress’ recent efforts to curb unfair and deceptive credit card practices, they remain as widespread as before. In fact, in several cases, they have grown even more common.
The media has been awash with anecdotal reports about unfair interest rate hikes and other abusive credit card practices over the past twelve months. However, the Pew study is the first to evaluate just how widespread these practices are. Started in July 2009, the study was based on an examination of nearly 400 different credit cards, including all online credit cards offered by the 12 largest card issuers in the U.S., which together hold more than 90 percent of the outstanding credit card debt.
Despite all the debate about giving credit card companies sufficient time to implement the changes of the Credit CARD Act of 2009, the vast majority of the credit cards surveyed had made little or no progress in changing some of the key terms regarding fees and penalties. Here are some of the key findings from the study:
1) Of the 400 credit cards reviewed, not a single card met the requirements of the new credit card law. All bank credit cards surveyed included at least one “unfair and deceptive” practice, which have been banned by the new law.
2) All but one (99.7 percent) of the 400 credit cards surveyed had terms which enabled the card issuer to increase credit card interest rates on existing balances unilaterally, i.e. without a triggering event on the cardholder’s side, such as a late payment. This is an increase from 93 percent in December of 2008.
3) 90 percent of bank-issued credit cards came with high default interest rates. The median default interest rate on the cards surveyed was 28.99 percent. For all but 10 percent of the cards, “hair trigger” events, such as a single late payment, would cause the default rate to step into effect. The rate would continue in effect, even after the cardholder continued on-time payments.
4) Fixed rate credit cards are increasingly being turned into variable rate cards, which are tied to the prime rate. Card issuers have come up with a new breed of variable rate cards, the so-called partially variable rate credit card with a fixed minimum rate. The interest rate on a partially variable rate card will go up with the prime rate, but it cannot go below a fixed, predetermined minimum.
5) 95 percent of bank credit cards still permitted issuers to apply payments to balances with the highest interest rates first, a practice characterized by the Federal Reserve as unfair, because it disadvantages cardholders and may cause substantial financial injury to consumers.
Lastly, the study found that advertised credit card interest rates rose substantially in the first half of 2009, even as banks’ cost of lending went down. Compared to last December, the lowest advertised credit card rate increased by more than 20 percent, and the highest by 13 percent. The most common purchase APR on bank credit cards fell within a range of 12.24 and 17.99 percent, compared to a range of 9.99 to 15.99 percent in December of 2008. Judging from consumer reports, credit cards already issued may well have been subject to the most aggressive rate hikes, however, there was no data available on how much interest rates had increased on these.
Based on the research, the report authors strongly support Congress’ efforts to move up the effective date for the new curbs on interest rate increases specified by the Credit CARD Act. They further note that given the troublesome findings of the study, “going forward, bank regulators have a crucial role to play in ensuring the goals of the Act are met. In particular, the Federal Reserve is responsible for creating new rules to ensure that all penalty fees and charges are “reasonable and proportional.””
Pew Charitable Trust is a non-profit, non-partisan organization, which conducts research into fact-based solutions to public policy issues.
