The real reason credit card rates are rising
The Credit CARD Act is unfairly blamed for higher interest rates, while the cause is something quite larger.
This guest post comes from Odysseas Papadimitriou at Card Hub.
Since early 2008, credit card interest rates have been on the rise. Critics of the Credit CARD Act of 2009 blame the legislation for increasing rates, but they neglect to consider the impact that today's economic environment has had on the credit card market.
After the housing bubble burst and financial institutions big and small began to falter, Americans have seen both unemployment and credit card interest rates rise significantly. We can all make a clear connection between widespread unemployment and the struggles of the housing and financial-services markets, as well as the trickle-down effect they've had on the retail industry, but for some reason have not been able to make the same connection when it comes to credit cards.
So is the Credit CARD Act truly to blame for the rise in interest rates, or is it something bigger?
To answer this question, we must first take a look at the law itself. Upon going into effect in February 2010, the law instituted a number of new rules, the majority of which have had two overall results:
- To eliminate bait-and-switch tactics, thereby increasing transparency throughout the industry.
- To improve consumer rights, largely by making penalty rates and fees commensurate to the misuse that causes them.
Because these changes limit credit card companies' revenue potential, many people believe that issuers have obviously raised interest rates to compensate.
However, two independent studies -- one from Card Hub, a credit card comparison website, and the other from the Center for Responsible Lending, a consumer advocacy group, have reached a far different conclusion.
According to Card Hub, examination of historical financial data reveals that the credit card interest rates during the 1992 recession were actually higher than those during the Great Recession, a time when unemployment and credit card delinquency rates were much worse. In addition, statistical modeling indicates that the high credit card payments consumers have been saddled with during the Great Recession should have actually been even higher, considering the overall state of the economy.
The study by the Center for Responsible Lending, which used different data sets and methods of analysis, reached this same conclusion and found that typical economic forces, not the Credit CARD Act, caused credit to dry up during the recent recession.
If the findings of these two studies haven't yet convinced you that the Credit CARD Act isn't to blame for the rise in interest rates, perhaps a few examples of current credit card offers that are even better than their pre-recession counterparts will:
- Citi alone offers two credit cards with 0% APR on both purchases and balance transfers for 21 months.
- Discover has a card with 0% on balance transfers for 18 months.
- Capital One's Venture Rewards Card is essentially a 2% cash-back card when miles are redeemed for travel-related purchases.
- The Chase Sapphire Preferred Card gives you 50,000 bonus rewards points (equal to $625) after you spend $3,000 in the first three months.
Do these offers seem to indicate some desperate need for issuers to compensate for lost revenue by jacking up interest rates or decreasing their cards' benefits? Post continues after video.
According to the Card Hub study, it never really made sense for issuers to compensate for lost penalty fee revenue by increasing interest rates anyway. Penalty fees are primarily relevant to credit cards for bad credit, and the only way high interest rates would prove beneficial is if they're applied to credit cards for excellent credit, where the highest balances reside. Credit card companies simply would not charge their best customers more and therefore risk losing them in order to compensate for changes in subprime account revenue streams.
What makes more sense is that the Credit CARD Act was merely a convenient scapegoat for some of the economic woes of the past few years. The timing of its introduction, passage and implementation was merely a coincidence that allowed for a plausible cause-and-effect explanation of higher credit card interest rates.
And while clarifying the impetus for rising costs might not make any of us feel any better about paying them, it at least allows us to rest assured that the regulations imposed on the credit card industry have truly been positive.
Odysseas Papadimitriou is the founder and CEO of the credit card comparison website Card Hub.
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