Study Analyzes Changes in Credit Card Industry Since CARD Act

The CARD Act has forced credit card issuers to make a number of good changes that are already benefiting consumers, but there is still room for improvement, so says a study by the Pew Health Group.

The study released last week–”Two Steps Forward: After the Card Act, Credit Cards are Safer and More Transparent–But Challenges Remain”–analyzed and compared the credit card marketplace before and after the CARD Act. The study reviewed credit cards offered inline by the twelve largest banks and twelve largest credit unions–nearly 450 credit card offers.

Here are some of the major findings from the Pew Study:

• Rates continued to increase. Overall, purchase interest rates have increased 30% between December 2008 and March 2010. In December 2008, the median purchase APR was between 9.99% and 15.99%. In March 2010, the range was 12.99% to 20.99%.

• Penalty interest rates received the most attention and criticism in the report. The Federal Reserve rules “permit a creditor to apply an increased rate to an existing balance when an account becomes more than 60 days delinquent.” But the report said that the implementation of the changes has led the emergence of a “troubling new trend.” Some issuers such as Bank of America no longer list the amount and terms of the penalty rate in the terms and conditions. They only include a sentence in the fine print that states they reserve the right to impose a penalty fee. The report argues that this goes against regulations; cardholders are entitled to know the pricing of their account, the penalty rates that could apply, and how high those rates could be. Altogether, one in five penalty disclosures mentioned the right way to “cure” (return to the original, non-penalty interest rate). Only three of ten banks that use penalty rates mentioned the legally mandated cure periods.

• 78% of banks offered an introductory rate for purchases and/or balance transfers. The median introductory period is seven months.

• No surveyed banks offered a fixed rate on any credit card.

• Rewards are not used to penalize cardholders for late or overlimit payments. 23% of surveyed bankcards put limitations on cardholders, preventing them from collecting rewards if there is a late payment or penalty on their account. Some issuers require a reinstated fee for lost points, but this is not described in the terms and conditions.

  For example, American Express will cancel points in Delta, Jet Blue, Hilton Hotels and Starwood Hotels accounts earned for that cycle if you have a late payment fee. They can be reinstated for $29 for each month.

• As of yet, legislation did not generate an increase in new annual fees. The number of cards that charge an annual fee actually dropped 1% from July 2009 to March 2010. However, during that time, the median annual fee increased from $50 to $59 for bank cards.

• Cash advance and balance transfer fees increased on average by one-third between July 2009 and March 2010–from 3% of each transaction to 4%. At the same time, cardholders are reducing their cash advances. In 2009, cash advances dropped by more than 40%.

• Only 5% of issuers disclosed the minimum payment formula as part of the application process. Those that did require 1% of principal balance.

There were also several recommendations from the Pew Study:

• Full disclosure of penalty fees. The issuer should clearly list actions that can trigger the fee, what the fee will be, and how/when the rate will return to a non-penalty fee.

• Monitor transaction surcharges to protect against deceptive hidden costs. Rising balance transfer fees equate to higher effective rates.

• Apply total monthly payment to the balance with the highest rate.

• Penalty rate should be no more than seven percentage points above the non-penalty rate.

• Consolidate all maintenance fees, including annual access membership fees, into a single annual fee so that pricing is clear and easy to understand and compare.

• Remove mandatory binding arbitration clause.

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About the Author: Bill Hardekopf

Bill Hardekopf is the CEO of LowCards.com a free, independent website that simplifies the confusion of shopping for credit cards and helps consumers easily compare cards in a variety of categories.

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