Widespread predictions that the Credit CARD Act of 2009 would usher in a new era of rising interest rates, sky-high annual fees and other bank penalties were off the mark, according to a study released last week by the Pew Safe Credit Cards Project.
The Pew study analyzed 300 cards issued by 12 leading U.S. banks and 12 credit unions and found that interest rates have mostly leveled off since 2010, annual fees have gone up only slightly and penalty charges have dropped sharply in the last year. Over-limit fees, in turn, have all but disappeared.
The study’s findings indicate that most banks have found a way to live with the new rules imposed by the Credit CARD Act and still turn a profit, despite the strict regulations. “The credit card market is stabilizing,” says Nick Bourke, director of the Safe Credit Cards Project and author of study. “And the credit card issuers are feeling a little more confident … in the post recession and post-regulatory environment.”
The study’s findings, says Bourke, show that the Credit CARD Act has been “quite successful” in protecting consumers from harmful practices, such as unexpected interest rate hikes and high penalty fees, while still allowing banks to compete in the market.
“We’ve seen quantitatively that the harmful practices have been eliminated from the market and the market is still functioning quite well,” says Bourke. At the same time, he says, “the changes that the Credit CARD Act brought has made people safer.”
Among the 2009-era predictions that were recently shot down by Pew’s study:
Prediction No. 1: Credit card interest rates will go up – a lot.
According to a previous Pew study published in July 2010, banks did push up interest rates immediately after the Credit CARD Act went into effect (with the steepest interest rate hikes going to new cardholders with less than stellar credit). However, rates for new cardholders have mostly held steady since the spring of 2010.
According to the study released Tuesday, the median advertised interest rate on bank-issued credit cards — 12.99 to 20.99 percent, depending on a consumer’s credit history — remained unchanged from March 2010 to January 2011. At the same time, interest rates on credit union-issued credit cards increased only slightly in 2011.
That said, there were significant fluctuations from issuer to issuer, with several banks widening the range between the lowest advertised card offer and the highest advertised offer. “The gap between the lowest advertised [APR] and the highest advertised has increased over the last few years,” says Bourke. But, he notes, interest rates for current credit card holders have hardly budged since 2008. “People who are actually revolving balances are [still] finding low rate cards.”
Interest rates on cash advances also declined this year, after shooting up 17 percent in 2010.
Prediction No. 2: Most cards will carry an annual fee.
This was one of the most widespread predictions that pundits and bank lobbyists bounced around before the Credit CARD Act went into effect in 2010 – with many predicting, according to Bourke, that “annual fees would become the norm.”
But their pessimistic forecasts didn’t pan out. “What our research shows is that’s not happened. The level of fees has gone up slightly; but still only one in five [cards] has an annual fee,” notes Bourke.
According to the Pew study, the percentage of bank-issued credit cards with an annual fee rose to just 21 percent in 2011 (up from 14 percent in 2010). At the same times, notes Bourke, the median annual fee for bank-issued cards held steady at $59, defying predictions that annual fees would skyrocket.
The median cost of credit union cards with annual fees also stayed flat at $25 in 2011 and the percentage of credit union cards with an annual fee didn’t budge either.
Prediction No. 3: Banks will find new ways to get around the rules.
This also hasn’t happened, says Bourke – at least in terms of interest rates and fees. “I have not seen a lot of indications that banks were getting around the rules.” Instead, he says, harmful practices, such as hair trigger penalty rates and over-limit fees, have simply “left the market.”
To illustrate, Bourke points to the Pew finding showing that over-limit fees have all but disappeared in 2011. “They are almost gone from the market now. Only one in ten [banks] include an over-limit fee.” In contrast, before the Credit CARD Act was implemented, over-limit fees were extremely common: More than 80 percent of banks featured them in 2009.
In addition, says Bourke, the Pew study found that penalties dropped sharply in 2011, thanks to regulations from the Credit CARD Act specifying that penalty fees must be “reasonable and proportional” to the violation. Penalty fees, notes Bourke, have now dropped from a previous median of $39 to a range of $25-$35, allowable by the Fed.