PETERBOROUGH, N.H.-The CARD Act has improved disclosures to consumers, but it has had the opposite effect when it comes to its intended goal of reducing cardholder costs, according to a new analysis.
Timothy Kolk of TRK Advisors said current credit card rates have increased the interest charges paid by consumers. According to Kolk's study of Federal Reserve publications and similar sources, with $684 billion in balances paying interest and interest rates 410 basis points higher than otherwise should be expected, the total market has seen its interest costs increase by $28 billion dollars per year.
Given there are approximately 120 million households in the U.S., with 56% having at least one credit card with a balance, that total translates to additional interest costs to these households of $420 per year at current balance and rate levels, the study found.
Although consumers have realized some benefits following the Feb. 22, 2010 implementation of the major provisions of the CARD Act, including restrictions on over-limit and late payment fees, and severe limits on the ability of issuers to increase interest rates on existing balances, Kolk asserted the net effect still tilts heavily toward issuers.
"The CARD Act has increased the borrowing costs of these 67 million households by an average of $420 each per year," Kolk wrote in the study. "In exchange for this additional expense, cardholders have been provided greater clarity in marketing and disclosure pieces, protection from repricing of existing balances, protection from certain delinquency pricing approaches, and reductions in certain fees. To be sure, the protections of the CARD Act are meaningful and bring benefit to card holders in several ways. What we leave for policy professionals to decide is whether the increased cost and interest rate risk borne by card holders is appropriately matched to the value of those protections."
CU Advantage 'Compressed'
Kolk told Credit Union Journal the impact of the CARD Act on credit unions is it "compressed" the credit union advantage by making it more difficult to explain how their cards are different from those issued by banks.
"Competition is down to APR, service and rewards programs," he said. "Credit unions have to make sure they price fairly at every level of credit risk, which is difficult to stay on top of. But the study demonstrates that a carefully run credit union credit card program can still compete with major bank issuers."
The CARD Act has made issuing fixed-rate credit cards riskier and, by and large, fixed-rate cards are not widely available from the most significant issuers, Kolk said in the study, adding, "interest rate risk does not disappear, it just relocates."
Any consumer who used to have a fixed-rate card but now has a variably priced card has had that risk relocate to his/her personal financial statement, the study continued. Kolk asserted this consequence of the CARD Act is "little understood" at the consumer level due to the current rate environment.
Today the average credit card rate is equivalent to Prime + 10%, which he noted is an "acceptable looking" 13.25% at this time. However, when Prime returns to a prerecession level, he warned consumers will see "material and potentially rapid" increases to their credit card interest expense as a result. For example, assuming a Prime rate of 8.0%, as was last seen in 2007, card holders would be looking at average interest rates in excess of 18%.
"We expect this will surprise many of them at that time," he wrote.
'World of Pain'
"Some day, fixed-rate credit card issuers are going to be in a world of pain," Kolk told Credit Union Journal. "I see some credit unions race to offer the lowest rate of any issuer in their market, and I think this study shows you don't have to race to the bottom to be effective. The banks have not been dropping their rates aggressively, and credit unions are competing on rates, which is not a mistake, but they don't have to be hundreds of basis points lower than the banks."
Kolk said the study's data showed large credit card issuers currently are pricing in the increased interest rate and other risks of being a credit card issuer post-CARD Act. With a few thousand credit unions issuing credit cards, he said he fears some CUs "do not really understand these increased risk levels and may be in for some unpleasant surprises if the interest rate or credit risk environment change from their currently benign state."
