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Research and Statistics

Study: U.S. credit cards more transparent since law


A study marking the one-year anniversary of the reforms enacted by the Credit CARD Act finds they haven’t raised prices, and have increased transparency

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In the year since landmark credit card reform rules took effect, consumer plastic has become more transparent in that the advertised interest rates more closely resemble what cardholders get, according to a study released Wednesday by a consumer advocacy group.

“What you see out there in terms of rates is closer to what people actually get on average,” says Josh Frank, the study’s author and senior researcher at the Center for Responsible Lending, a North Carolina-based consumer research and advocacy group.

The study also found that despite banks’ assertions that the new law would raise interest rates for all consumers, annual percentage rates (APRs) have remained flat on average when you discount the impact of the economic downturn.

“We found no evidence of rate increases in terms of the real rate that people are paying,” Frank says.

See related:A guide to the Credit CARD Act of 2009, The Credit CARD Act turns 1

Reform law in effect 1 year

Feb. 22, 2011, will mark one year since major provisions of the Credit CARD Act of 2009 took effect. That law, signed by President Obama in May 2009, ushered in the most sweeping changes in the history of credit cards. The change impacting consumers most was one that ended surprise interest rate hikes. Banks can no longer freely jack up interest rates on consumer credit cards. APRs can be increased on existing card balances in only a limited number of circumstances, such as when cardholders are more than 60 days late paying their bills. (For more on the CARD Act see our Guide to the Credit CARD Act.)

“Before the CARD Act, what people paid was much higher than the rate they saw,” says Frank.

Because the credit card reform law kicked in just as the economic downturn gripped the country, industry and banking analysts have said it was difficult to say for certain which development had the greatest impact on credit card rates — the economy or the regulations.

Frank says his research used statistical analysis to separate the two factors and found the CARD Act has not caused APRs to rise or credit to constrict.

The CRL study analyzed five different sets of data (including one compiled by to gauge the impact of the law on credit card interest rates.

Gap falls between promised rate, actual rate

The major findings were based on data released monthly by the Federal Reserve showing interest rates consumers actually pay on their credit cards. Researchers say this is a better measure than rates that are advertised by issuers or offered in direct mail solicitations. The study showed there was a gap between what consumers are offered for interest rates and what they actually paid. That gap narrowed after the credit card reforms took effect and stated rates were close to actual rates paid.

The study put a dollar figure on the impact of that transparency: Compared to before the law, $12.1 billion in credit card interest charges are now more clearly disclosed to cardholders.

Researchers also looked at bank “Call Reports,” which are filed quarterly with federal banking officials and show income and financial statements of commercial banks. That analysis was further evidence of pricing transparency, according to the study. Another analysis focused on direct mail volume before and after the law’s implementation. When they controlled for the effect of the economic downturn, “the number of solicitations has held steady or even risen,” according to the study.

The study also looked at how business credit cards — which are not covered by the CARD Act protections — fared during the time periods before and after the consumer card reforms took effect. Using a database of card rates compiled by and updated weekly by, Frank found that when looking at credit card offers, business credit card rates increased just as they did for consumer credit cards. “The change in rates for business cards was similar to the change in rates for consumer cards, suggesting it was the economy, not due to regulation,” Frank says.

In fact, new Federal Reserve data suggests that the actual rate paid by consumers has fallen recently. The agency’s report on outstanding consumer credit found that from October 2010 to November 2010, the average APR on an account assessed interest fell from 14.22 percent to 13.67 percent.

Industry sees trade-offs

The banking industry says although consumers have benefited from the card law reforms, there have been trade-offs that haven’t been so beneficial. Annual fees have been reinstated or added to many accounts, and banks have introduced a host of new fees in an attempt to make up projected revenue shortfalls from interest consumers are no longer paying.

“As we had sort of forewarned, the trade-off is higher prices,” says Peter Garuccio, spokesman for the American Bankers Association trade group. “There are more annual fees, and reductions in available credit have certainly happened. The real untold story is who is not getting the credit. We’re hearing anecdotally that it’s people on the lower end of the credit spectrum. They are just not getting the access they’re used to.”

He adds: “Overall, things have been a net positive for consumers. Interest rate increases on existing balances are a thing of the past. There are other interest rate protections. Billing practices are a lot more consumer friendly. Disclosures are vastly improved. All these things mean greater certainty and greater control for the consumer.”

CARD Act costs industry $11 billion

Industry analyst R.K. Hammer puts the net impact of the CARD Act on banks at $11 billion a year in lost revenues. Hammer says new fees and increases in existing fees have had a major impact on consumers and “2011 will bring more of the same.”

Nick Bourke, director of the Pew Charitable Trust’s Safe Credit Cards Project, agrees that many of the negative consequences predicted by reform law opponents haven’t panned out.

“Predictions like annual fees would become more common have turned out to not be true,” says Bourke. “They’ve remained just as common as they were before the act.”

He leads an ongoing project that monitors credit card terms, rates and practices and issues periodic reports on the industry. Pew researchers looked at all credit cards offered by the 12 largest banks. They found that only 14 percent of those cards featured annual fees — the same level as 2009.

Foreign transaction fees have crept up from 3 percent of the transaction to 4 percent between 2009 and 2010.” Otherwise, we have not seen an increase in fees or a bunch of fees,” Bourke says.

He says the net effect of the credit card reform law has been to open the credit card market to function with normal competition between banks. Prior to Feb. 22, 2010, a host of deceptive and unfair practices gave some banks an advantage over others signing up new customers.

“Credit card issuers that did not want to rely on practices like retroactive rate increases had a hard time competing,” says Bourke. “Their competitors were making their products look more attractive with lower upfront pricing and then hitting consumers with higher prices afterward.” The new law has eliminated those unfair advantages and is allowing banks to compete for customers more transparently, he says.

Adds Frank: “Now that price competition is working, over time we’ll see long-term rates improve.”

Garuccio, from the bankers group, says banks and credit unions issuing credit cards face a significant challenge in the future from both existing and future regulations.

“The challenge will be for banks to continue to find a way to make credit cards available to all consumers,” he says. In the months before and after the CARD Act passed, there was a “flight to quality,” meaning banks shunned bad credit customers by closing accounts, raising interest rates and lowering credit limits. They focused more attention on prime and superprime customers with good and excellent credit. In recent months, however, more lenders are willing to give people with poor credit histories a second look and not reject them automatically.

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