Credit card reform: The other shoe drops
Are the new restrictions on card companies worth the tradeoffs we were warned to expect -- less credit and higher interest rates?
This should come as no surprise: Credit card interest rates in the second quarter of 2010 were the highest they've been since 2001. Some expect rates to keep rising.
Higher rates were the industry's response to the Credit CARD Act -- which limits some of the card companies's more egregious moneymaking practices -- as well as to high default rates among struggling customers. (As we noted last week, the final provisions of the CARD Act have kicked in.)
The higher rates are all the more notable given that other interest rates -- like those on mortgage loans and the banks' own costs of borrowing money -- are remarkably low, The Wall Street Journal observes.
Here is what has happened in recent months, according to The Wall Street Journal and other news reports: Post continues after video.
- Higher interest rates on existing cards. The average interest rate on existing cards in the second quarter was 14.7%, according to research company Synovate. The gap between the prime rate and the average credit card interest rate was 11.45 percentage points, thought to be the largest in 22 years, the WSJ says.
- Higher rates on new cards. The WSJ reported several examples of this, including an increase of 2.9 percentage points on Capital One's Classic Platinum for Young Adults, now at 19.8%. Ouch.
- Lower credit limits. In May, the average credit limit on new cards was $3,923, 11% lower than last year.
- Closer monitoring of customers' accounts. Behaviors that could flag you as a risk -- and put you at risk for a higher interest rate on new purchases -- include recent spikes in card usage and late payment of bills. The WSJ also says:
Several large U.S. banks have begun parsing employment and income data for changes that could affect the riskiness of existing customers, says John Cullerton, vice president at Equifax Inc. He declined to name the lenders.
Will credit become even harder and more expensive to get? Perhaps not. CreditCards.com reports:
The Federal Reserve's latest survey of senior loan officers … shows that credit card lending has begun to thaw after a three-year freeze. About 8% of banks said they eased their lending standards in the second quarter of 2010, while none said their standards had tightened.
Meanwhile, consumers seem undeterred by higher interest rates. Also from Synovate, which has been tracking this stuff for more than 20 years:
On average, households with credit cards are spending $1,559 (per month) across all the cards in the wallet in 2010, a 6% increase compared to $1,471 in 2009. This average spending across all cards is on a continual rise, reaching $1,627 for Q2 2010 across all cards in the wallet. The only time consumers spent more was in Q3 2008, the quarter prior to the financial meltdown.
That's great for the economy, but not good if you can't pay off your balance each month.
What can you do if interest rates continue to creep up?
- Do not carry a balance. Not. Ever. When my card company raised its rates, I didn't blink. It's a great place to be.
- Pay on time. Under the new law, the interest rate on existing balances can jump if your payment is more than 60 days late. Beverly Blair Harzog of CardRatings.com says the average penalty rate is 29.99%. (It will be lowered after six months of on-time payments.)
- Don't charge up to your card's limit. Keeping credit utilization under 30% of available credit is also good for your credit score.
- If your bank and your card issuer are one and the same, make sure you keep a healthy sum on deposit at the bank. Good bank customers get the better credit card deals.
- Decline the higher rate. Credit card reform requires 45 days' notice before a rate increase can take effect (unless your card has a variable rate, which it likely does). That gives you plenty of time to decline and avoid the new rate. The account will be closed, and you'll be given a timeline to pay off any balance.
- Get a new card and transfer the balance. If you have good credit, banks are falling all over themselves to get your business. From Synovate:
During Q2 2010, U.S. households received 640.3 million credit card offers, an 83% increase, versus 349.1 million offers mailed during the same time a year ago. … Introductory offers have increased to 71% (of all offers), the highest since Synovate Mail Monitor began tracking this data back in 1988.
What do you think? Are the new restrictions on card companies worth the tradeoffs we were warned to expect -- less credit and higher interest rates?
Megan McArdle of The Atlantic isn't sure. Those who pay their bills late (less than 60 days) are getting a break (lower late fees and fewer rate hikes), and those who pay on time but can't pay off their balance each month are paying higher interest rates. It doesn't seem fair.
McArdle wrote: "I am not sure that the group we are rescuing from sudden interest rate changes and late fees is more needy than the group who is now paying higher interest rates to counterbalance the fees. Indeed, the higher interest rates could conceivably tip some people into the 'misses bills' group."
Jane Bryant Quinn summed up the benefits of credit card reform in a post at CBS MoneyWatch -- and there are many, greatest among them much more transparency:
Banks can't charge you overdraft fees without your consent. They can't suddenly raise your credit card interest rates on all past purchases. They can't sell you a "fixed rate" card and then raise your rate the following week. They can't manipulate the hour when they post your monthly payments, so that your on-time payment registers as late. They can't raise your rates at any time, for any reason, by surprise.
Overall, I think we're better off. How about you?
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