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Credit card rates are up, but reform is working

The CARD Act after one year: Interest rates have risen but penalty fees have dropped dramatically. On balance the law seems to be working as intended for consumers.

It’s been nearly a year since the major provisions of the credit card reform law took effect. A lot has changed since then, most of it for the better.

Under the CARD Act, penalty fees have dropped dramatically and interest rate hikes cannot be applied to your unpaid balance, unless you fall way behind in your payments.

On the downside, it may be harder for someone with a poor credit history to get a card, and interest rates are up. A recently released , a non-profit group, shows the average interest rate on variable rate cards went up nearly 2 percentage points last year, from 13.30 percent in 2009 to 15.06 percent in 2010. The report notes that during that time the prime rate remained steady at 3.25 percent.

“No one wants to see rates rise,” says Linda Sherry, Consumer Action’s director of national priorities. “But we’re better off now that issuers have to price accounts appropriately from the start instead of sneaking profit in on the back end with ‘gotcha’ penalty fees and rates.”

Consumer Action looked at offers for 41 cards from 20 different issuers. Study author Ruth Susswein concludes that as a result of the CARD Act, it is now easier than ever to compare credit card offers.

“Interest rates are more transparent today than they were in the past,” Susswein says. “It doesn’t mean that rates can’t go up or that you can’t be penalized. But there’s a much better chance that you’re going to know up front what you’re really going to pay for credit.”

The nation’s card issuers clearly realize the rules of the game have changed.

“Consumers are squarely in the driver’s seat when it comes to their credit cards,” says Nessa Feddis, vice president and senior counsel with the American Bankers Association. (I wouldn’t go that far, but we certainly can’t be jerked around as much as before.)

The ABA lobbied Congress not to pass the CARD Act. The association predicted the law would hit consumers in the pocketbook. And Feddis says, that’s exactly what happened.

“Interest rates are up a bit for everybody, and it is more difficult for people to get credit cards, particularly those with weak or short credit histories.”

released this week by the Center for Responsible Lending says things aren’t as bad as they may seem at first glance.

The center analyzed years of data from the Federal Reserve Board. One database tracks the interest rates offered in solicitations. Another follows the interest rates customers actually pay. Comparing that data, the CRL report concludes: The new rules have reduced the difference between the stated rates and actual rates paid on credit cards.

“There had been this widening gap between what people were told they were going to get in solicitations and what they actually ended up paying,” says Kathleen Day of the CRL. “Because of credit card reform, that gap was narrowed, not because prices went up, but because the stated price on offers went up to reflect reality.”

The Center for Responsible Lending says about $12 billion in “previously obscure yearly charges” are now stated more clearly in credit card offers.

The CRL study also concludes that since credit card reform, more people are getting more credit card offers. The center purchased data from the Mintel Comperemedia, a respected authority on credit card marketing.

This data shows that since the beginning of 2009, the number of U.S. households receiving at least one credit card offer has increased from about 40 percent to about 60 percent. This increased competition, the report says, lowers prices and makes it harder for credit card companies to “manipulate or arbitrarily raise prices.”

Some fees up, some fees gone
While the CARD Act limits penalty fees, there are no restrictions on many other fees. Consumer Action found the average balance transfer fee jumped from 2.94 percent in 2009 to 3.53 percent in 2010. And while the highest transfer fee charged in 2009 was 3 percent, some cards now charge 5 percent.

Annual fees are also up a bit, averaging $65.20, but fewer cards now charge them. It was widely assumed credit card companies would institute annual fees across the board to make up for lost penalty revenue. So far that has so not happened.

And two big banks have voluntarily decided not to impose interest rate hikes they could legally make. Bank of America and Wells Fargo have eliminated the “default rate.” That’s the much higher rate banks are allowed to apply to the current balance when an account is more than 60 days past due.

Lisa Westermann, Wells Fargo’s vice president of communications, says the bank did this “to provide credit to as many customers as possible.”

At Bank of America, spokeswoman Betty Riess says they recognized that customers who are several payments past due are having financial difficulty. “We want to help customers who are struggling to make their payments,” she says, “not make it more difficult to do so.”

The bottom line
Thanks to the CARD Act, credit card companies cannot raise the interest rate for new customers during the first year. So banks are being very careful about the initial interest rate they offer.

“The driving factor as to whether or not you get approved for a credit card and what terms you get is still going to be your credit risk,” explains John Ulzheimer with .“So a credit score is still the most important figure that a credit card issuer focuses on.”

There are a number of websites that do a good job of letting you compare cards side by side on factors such as interest rates, fees and what type of credit scores are required:,,,,, and

Just remember, the results on these commercial sites often favor advertisers, whose cards are put at the top of the list. To get the full picture of what’s available, you’ll need to sort the list based on APY or annual fee, depending on what is most important to you. And since no site can list all the card offers, check a few before you apply.