Earlier this week, the final set of credit card reform rules went into effect, ending (at least for now) a year-plus-long journey in which the credit card landscape has changed in many ways. Some of the changes were intended by the reformers crafting the new rules, including that consumers now must be given ample time to pay bills and receive sufficient notice regarding changes in the terms of a card, there is now a cap of $25 on most late-payment fees, and silly charges like “inactivity fees” (a fee for NOT using your card) are banned. Some of what’s changes to the card market, however, fall into the category of unintended consequences, notably soaring interest rates.
While the creeping rise in credit card rates has been taking place at least for a year, a WSJ story recently put current rates into perspective:
In the second quarter, the average interest rate on existing cards reached 14.7%, up from 13.1% a year earlier, according to research firm Synovate, a unit of Aegis Group PLC. That was the highest level since 2001.
Those figures look especially stark when measuring the gap between the prime rate—the benchmark against which card rates are set—and average credit-card rates. The current difference of 11.45 percentage points is the largest in at least 22 years, Synovate estimates.
Card issuers explain that the rise in rates is a direct result of new consumer protection efforts: Because card issuers are limited in the kind and number of fees they can collect, they’re seeking to make money in the next-easiest manner possible, via rate hikes. What’s more, for every new rule intended to protect consumers, banks and card issuers have come up with one or more new counterstrategies to keep milking consumers, which is obviously essential to the mission of making profits.
As you can read in an AP story and a USA Today piece that both highlight the final card rules going into effect, the new stipulations have plenty of loopholes, and a cardholder who blindly thinks legislation is going to protect him from getting hit with fees and going into debt is probably going to be a consumer who gets hit with fees and goes into debt.
Here’s the AP story’s discussion of the new rules restricting rate hikes:
New protection: Banks must review a rate hike every six months to decide whether the increase is still warranted. If the factors that prompted the hike are no longer applicable, the rate must be lowered. This rule applies to hikes dating back to Jan. 1, 2009, when banks began raising rates in anticipation of the new regulations.
And a corresponding loophole consumers must be aware of:
Gaps to watch: Even if a bank finds that a rate should be lowered, the reduction doesn’t have to restore the prior interest rate. So even if a rate was increased 10 percent, a review could result in a 1 percent scaleback.
Here’s the USA Today story pointing out that the $25 cap on late fees is not necessarily set in stone:
Don’t let these changes lull you into thinking it’s OK to get sloppy about your bills. The ceiling on penalty fees is limited to one misstep. If you make more than one late payment in a six-month period, your issuer can charge you up to $35.
In other words, new protections are nice, and may protect you in some ways, but considering all the loopholes and gaps to watch out for, the rules are not sufficient enough to allow you to let your guard down. No regulations will ever protect you better than your own vigilance.
And so this is why, despite all the changes in fees, transparency, rates, and overall availability of credit that have occurred since the late spring of 2009, the current credit card landscape isn’t all that different from the old credit card landscape.
Who is going to be hurt by today’s high interest rates and the new tricks being pulled by banks and card companies? Ignorant, irresponsible, and undisciplined consumers who buy things they shouldn’t buy and don’t pay their bills on time and in full—the same set of consumers who were hurt financially by the old fees and the old tricks pulled by banks and card companies.