Two Steps Forward
After the Credit CARD Act, Credit Cards Are Safer and More Transparent — But Challenges Remain

Times have changed in the credit card industry. After months of economic recession, heightened unemployment and historic legal reforms, credit cards today look very different than they did just a year or two ago. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 was intended to create a fairer and more transparent marketplace, and initial indicators suggest that it is meeting its goals.¹ One recent survey showed that nearly three in four American credit card holders agreed that their accounts are better off today than they were prior to passage of the new law.²

To implement the Credit CARD Act, Congress directed the Federal Reserve Board to issue three sets of new rules. In August 2009, the Federal Reserve required issuers to give consumers 45 days to evaluate changes in rates or fees before those changes could apply. In February 2010, new rules limited issuers’ ability to raise interest rates on existing balances, impose penalty rates, assess overlimit fees and apply payments in ways that unfairly maximized finance charges. Finally, in August 2010, a new set of rules will attempt to satisfy the new law’s mandate that “any penalty fee or charge” must be “reasonable and proportional.”

This report presents findings of the Pew Health Group’s most recent assessment of the credit card marketplace, based on data collected in March 2010. Like our previous publications (based on data from December 2008 and July 2009), this report represents an analysis of prices and practices based on a thorough review of written credit card application disclosures. These findings reflect all consumer credit cards offered online by the largest 12 bank and largest 12 credit union issuers—nearly 450 credit cards in all.

Our latest research confirms that many troublesome practices have disappeared from the market. The Credit CARD Act targeted what regulators called “unfair or deceptive” practices, such as “hair trigger” penalty interest rate increases on existing balances for minor account violations, unfair payment allocation and imposition of overlimit fees without consent. Prior to the recent legal reforms, Pew’s research showed that 100 percent of credit cards from the largest banks included these and other practices that are now banned.3 The elimination of these practices marks a major improvement since our July 2009 data collection.

Predictions that legal reform would stimulate the growth of new fees have so far not materialized.⁴ Just 14 percent of all reviewed cards included an annual fee (compared to 15 percent in July 2009), and there was no indication of a trend toward adding new types of fees. Yet the median size of annual fees grew between July 2009 and March 2010, rising from $50 to $59 for banks and from $15 to $25 for credit unions. When annual fees did apply, they were clearly listed within legally mandated pricing disclosure tables.

Overlimit fees and arbitration clauses have become much less common. Fewer than 25 percent of all surveyed cards had an overlimit fee, down from more than 80 percent of cards in July 2009. Arbitration clauses, which impair consumers’ rights to settle disputes in court, are now found in only 10 percent of bank card disclosures, compared to 68 percent in July 2009. At the same time, advertised interest rates continued to rise (see feature box). 

INTEREST RATES CONTINUED TO RISE FOR MANY CONSUMERS

Credit card issuers typically advertise a range of interest rates for cardholders with different credit scores. Pew has tracked interest rates at two levels—lowest advertised and highest advertised—over several survey periods. Median advertised rates continued to rise for many consumers in the most recent period. See Table 1 for a summary of median advertised interest rates.

Among the banks, growth in lowest advertised purchase rates has slowed (growth was 6 percent between July 2009 and March 2010 compared to 23 percent between December 2008 and July 2009). Conversely, highest advertised purchase rates grew more, rising by 17 percent in recent months compared to 13 percent in the earlier period. Overall, both highest and lowest advertised bank purchase rates grew by 30 percent in the 15 months between December 2008 and March 2010.

Among the credit unions, lowest advertised rates did not change between July 2009 and March 2010 (Pew did not track credit union data prior to July 2009). During the same period, highest advertised credit union purchase rates rose by 17 percent. Credit card interest rates and fees were generally lower among the largest credit union issuers compared to the largest bank issuers.

Still, challenges remain. Even under new regulations, penalty interest rate practices remained widespread. At least 94 percent of bank cards and 46 percent of credit union cards included penalty rate terms. Where disclosed, the median penalty rate rose by one percentage point from July 2009, to 29.99 percent. Unfortunately, the Federal Reserve recently refused to set rules to ensure that penalty interest rate increases are subject to its “reasonable and proportional” standards, indicating its belief that Congress did not intend such regulations to exist.

A troubling new trend emerged: some disclosures stopped including the size of penalty interest rates even as issuers reserved the right to impose them. Other issuers failed to state what cardholder actions would trigger penalty rate increases or how cardholders could return to non-penalty rates. Under longstanding banking regulations, cardholders are entitled to know the key pricing terms of their accounts, including when penalty rates may apply and how high they may be. When issuers withhold key penalty pricing information, cardholders become vulnerable and uninformed. It is a worrisome trend that runs counter to the Credit CARD Act’s goals of transparency and simplicity.

Meanwhile, surcharge fees for cash advances rose sharply. Bank cash advance and balance transfer fees rose by one¬third between July 2009 and March 2010, from 3.00 percent to 4.00 percent. Credit union cash advance fees rose by one quarter, from 2.00 to 2.50 percent. Compared to bank cards, credit union cards generally remained less likely to include surcharge fees and more likely to cap the fees voluntarily to a stated maximum.

The cost of penalty fees generally held steady—but may soon drop. The size of bank penalty fees for late payments or overlimit transactions remained unchanged, at a median of $39. Credit union late fees rose to a median of $25 (up from $20 in July 2009). Overlimit fees for the 19 percent of credit union cards that included them remained unchanged at $20. The Federal Reserve recently announced new regulations that will take effect in August 2010. The rules will cap some penalty fees and generally require issuers to provide justification for any penalty fee of more than $25 to federal regulators.