Pew researchers: Interest rates stabilizing 2 years after CARD Act

Contrary to predictions, credit card holders are seeing stabilized interest rates, the elimination of over-the-limit penalty charges, a reduction in late fees charged by banks and minimal changes in annual fees since the landmark Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 took effect, according to new research by the Pew Health Group’s Safe Credit Cards Project.

Pew data show that the median advertised interest rates for purchases on bank credit cards remained unchanged from 2010. Meanwhile, bank cash advance and penalty rates held firm. Additionally, the percentage of cards with annual fees held steady for credit unions at 14% and increased for banks from 14% in 2010 to 21% in 2011. The amount charged for annual fees remained unchanged.

"Pew’s research shows that predictions that the legislation would spark new charges and long-term interest rate growth have not materialized," said Nick Bourke, director of Pew’s Safe Credit Cards Project.

"Whatever increases in advertised interest rates we saw going into 2010 have not continued into 2011. The act created a new equilibrium where interest rates have flattened, penalty charges have declined and a number of practices deemed 'unfair or deceptive' have disappeared. Consumers are enjoying safer, more transparently priced credit cards - and banks and credit unions are able to compete on a more level playing field," he said.

The study, "A New Equilibrium: After Passage of Landmark Credit Card Reform, Interest Rates and Fees Have Stabilized," is the latest in a series of reports from the Pew Safe Credit Cards Project that has examined all consumer credit cards offered online by the nation’s 12 largest bank and 12 largest credit union issuers.

Together, these institutions control more than 90% of the nation’s outstanding credit card debt.

One caveat the study doesn’t address, however, is that most credit cards now carry variable rates, so if the prime rate starts to rise, that would lead to consumers paying higher rates on their cards.

Here are the key findings:

Interest rates have stabilized.
Median advertised interest rates for purchases on bank-issued credit cards held steady at 12.99 to 20.99%. Likewise, bank cash advance and penalty interest rates remained unchanged from 2010 to 2011. During that same period, median credit union purchase rates slightly increased and cash advance rates declined.

Penalties cost less.
Since the enactment of the legislation, over-the-limit penalty fees have all but vanished. Only 11% of bank credit cards now include them, while the largest credit unions have eliminated them entirely. Pew’s research finds that late fees continue to be widespread. However, the cost of fees has gone down now that the law limits first-time late fees to $25 in most cases.

Annual fees have changed little.
Last year, roughly 14% of both bank and credit union cards carried annual fees; in 2011, that number held steady for credit union-issued cards and rose to 21% for bank-issued cards. The amount charged for annual fees held stable at a median of $59 for banks and $25 for credit unions. Forty percent of cards with annual fees included no-fee promotions for the first year.

"The Credit Card Act is an excellent example of how bipartisan legislation can be enacted that both protects consumers from potentially harmful practices while simultaneously creating a marketplace where banks and credit unions are able to compete based on clear and predictable pricing," said Eleni Constantine, director of the Financial Security Portfolio at the Pew Health Group. "Congress should take a similar approach to make other financial products, such as checking accounts and short-term, small-dollar loans, safer and more transparent."

The Pew Health Group is the health and consumer-product safety arm of The Pew Charitable Trusts, a nonprofit, public policy research organization.