- The Washington Times - Monday, May 16, 2011

The credit card industry’s bark looks worse than its bite.

A new study finds that more than a year after provisions of a major credit card reform act took effect, the dire warnings of higher borrowing rates, bigger penalties and fewer options for consumers have not come to pass.

Instead, according to the Pew Safe Credit Cards Project, interest rates, penalties and annual fees have stabilized, for the most part, as consumers enjoy greater protections and more transparency.

“Pews research shows that predictions that the legislation would spark new charges and long-term interest rate growth have not materialized,” Pew survey director Nick Bourke said in a statement. “Whatever increases in advertised interest rates we saw going into 2010 have not continued into 2011.”

Mr. Bourke said the Credit Card Reform Act appears instead to have created a “new equilibrium” in which borrowing “rates have flattened, penalty charges have declined and a number of practices deemed ‘unfair or deceptive have disappeared.”

Under the new law, which garnered bipartisan support, credit card companies cannot retroactively increase interest rates on a customer’s existing balance, among other things.

Some feared this would lead banks and credit unions to create new fees to make up for losses in other areas. But the study, which collected data in March 2010, just after the law’s provision were implemented, and January 2011, found that banks’ median advertised interest rates for purchases stabilized between 12.99 percent and 20.99 percent. Cash advance and penalty rates also remained unchanged.

For credit unions, the median purchase rates increased slightly, but they were still lower than that of the banks. Cash advance rates declined.

Across the industry, “over-limit” penalty fees have “all but vanished,” the study found. The largest credit unions have eliminated the fees, while only 11 percent of banks still impose them.

At the same time, while late fees continue to be widespread, the cost has shrunk now that the law limits most late fees to $25.

But the banking industry argues that card issuers raised their rates long before the law was enacted, said Nessa Feddis, vice president and senior counsel at the American Bankers Association. As far back as December 2008, the Federal Reserve adopted a similar rule that fueled changes in the industry, even before Congress acted.

Looking at the changes from 2010 to 2011 does not show the whole impact of the law, she said.

“Banks already knew this was going to be a new rule,” she said, “so you’re going to have to change your business model.”

Sanjay Sakhrani, an analyst with the financial industry monitoring firm Keefe Bruyette and Woods, agreed.

The intention of the credit card reform was to provide more transparency to consumers, not to lower rates, Mr. Sakhrani explained.

“There’s definitely more transparency today than there was before,” he said. “However, there are unintended consequences.”

One problem is that now all cardholders are paying higher rates, not just those with bad credit. “I think it’s a little bit worse, because more people are paying higher rates,” Mr. Sakhrani said.

Another result is that many people with bad credit can no longer get credit cards, he added, because the card issuers have a harder time turning a profit.

Pew researchers looked at all consumer credit cards offered online by the nations 12 largest banks and 12 largest credit union issuers. Together, these institutions control more than 90 percent of the nations outstanding credit card debt.

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