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Credit Cards More Transparent, Yet Problems Remain

July 23, 2010
KEYWORDS cards , fees , rates
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Most of the practices deemed “unfair” or “deceptive” by the Federal Reserve have disappeared from new credit card offers since federal passage of the Credit CARD Act last year, according to a new report by the Pew Health Group’s Safe Credit Cards Project. Yet new trends have emerged that could cost cardholders significantly.

The report finds that issuers have eliminated practices such as “hair trigger” penalty rate increases (disproportionate charges for minor account violations), unfair payment allocation, and raising interest rates on existing balances.

However, Pew’s research also highlights a sharp rise in cash advance fees, continued widespread use of other penalty interest rates, and an emerging trend of credit card companies failing to disclose penalty interest rates in their online terms and conditions.

“While it’s been less than a year since passage of the Credit CARD Act, the new law appears to be working for millions of Americans who have credit cards,” says Shelley A. Hearne, managing director of the Pew Health Group. “Most of the news is good, but we are seeing the rise of new harmful behavior.”

The study, “Two Steps Forward: After the Credit CARD Act, Cards Are Safer and More Transparent—But Challenges Remain,” 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 banks and 12 largest credit unions.

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

Key findings show:

• Many troublesome practices have been eliminated. A credit card issuer can no longer unilaterally decide to raise interest rates on existing balances.

Likewise, practices including “hair trigger” penalty rate increases, unfair payment allocation, and over-limit fees without prior consent are a thing of the past. Earlier Pew research found that before the implementation of the law, 100% of the credit cards surveyed included at least one of these practices.

New practices are benefiting consumers. Less than 25% of all cards examined had an over-limit fee, down from more than 80% of cards in July 2009.

Additionally, mandatory arbitration clauses, which can limit a consumer’s right to settle disputes in court, are now found in 10% of cards, compared to 68% in July 2009.

New fees have yet to materialize. There was minimal change in the number of cards that include an annual fee (down one percentage point from July 2009 to March 2010). During that period, the median size of these fees increased from $50 to $59 for banks and from $15 to $25 for credit unions.

Some disclosures stopped including the size of penalty interest rates even as issuers reserved the right to impose them. At least 94% of bank cards and 46% of credit union cards came with interest rates that could go up as a penalty for late payments or other violations. But nearly half these warnings failed to inform the consumer of the actual penalty interest rate or how high it could climb.

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