Credit card interest rates rise ahead of new law
Regulations, recession make card issuers pull the APR trigger
By Jeremy M. Simon | Published: July 2, 2009
The pre-emptive strikes taken by banks ahead of new lending laws have found their way into credit cardholders' terms and conditions.
|CreditCards.com's weekly rate chart|
|Avg. APR||Last week||6 months ago|
|Methodology: The national average credit card APR is comprised of 95 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers and representing every card category listed below. (Introductory, or teaser, rates are not included in the calculation.)|
|Updated: July 2, 2009|
Credit card issuers are boosting interest rates, as evidenced by a national average annual percentage rate on new credit card offers that rose this week, according to the CreditCards.com Weekly Credit Card Rate Report.
Banks are raising APRs ahead of a new law signed by President Obama in May. "The policy changes made at the end of 2008 will inhibit the ability of credit card companies to increase rates on customers based on universal default," says Joe Brusuelas, director with Moody's Economy.com. For now, though, banks are taking advantage of universal default, which allows rate increases on a card that has been paid in a timely manner simply because the cardholder was late making payment on another account.
Universal default's days are numbered -- and card issuers know it. "Once the law changes, it's over," Brusuelas says.
Most major credit card issuers don't need to wait for a cardholder to default. They can, until the law changes, raise rates at any time, for any reason. Issuers say they are raising their rates based on the increasing rates of default as their customers become riskier borrowers as unemployment rises in the recession.
Among the changes banks are introducing, the Financial Times said Tuesday that Citi sharply increased APRs on 15 million cards that it issued with its retail store partners. In a response, the company did not specify the number of cardholders facing rate increases, but acknowledged it was adjusting prices due to higher costs.
Politicians who led the fight for credit card reform reacted harshly to rate hike announcements.
"Rate hikes on existing balances being reported by news media and consumers, even when consumers pay on time and follow the rules, are unfair and deceptive and must be stopped," Rep. Carolyn Maloney said Wednesday. The New York City Democrat was the chief sponsor of the House's credit card reform bill. "Capricious actions like these are why Congress overwhelmingly passed, and President Obama signed, my credit card reform bill: to level the playing field on behalf of consumers."
Sen. Charles Schumer (D- N.Y.) on Wednesday asked the Federal Reserve to limit rate hikes over the period before the law takes effect. "This is what many of us feared about a law that didn't take effect right away," Schumer said in a Washington Post article. "It was never going to take this long for the credit card companies to get ready for the new reforms. Instead, issuers are using the delay in the effective date to wring more dollars out of their customers. It is against the spirit of the law, and it is just plain wrong."
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Meanwhile, the Fed appears unlikely to boost its key lending rate with the unemployment rate advancing to 9.5 percent in June -- the highest level in more than 25 years. Additionally, San Francisco Fed President Janet Yellen acknowledged that the economic recovery could be slowed by a federal funds rate that can't go any lower. The fed funds rate dictates banks' prime rates, to which the APRs for variable rate credit cards are tied.
"In past deep recessions, the Fed was able to step on the accelerator by cutting the federal funds rate sharply, causing the economy to shoot ahead. This time, we already have our foot planted firmly on the floor. We can't take the federal funds rate any lower than zero," Yellen said in a speech.
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