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Study: Credit Card Pricing More Transparent After CARD Act

When the Credit CARD Act was passed in 2009, banking experts and industry analysts predicted that the new rules would increase the cost of credit and make it harder to get. But a recent study by consumer advocacy group, the Center for Responsible Lending,  suggests that these concerns may not have panned out.

While credit card interest rates climbed shortly after the Credit CARD Act of 2009 was passed, the study found that, when you take into account the economic downturn, the actual rate consumers have paid on credit card debt has largely remained level.

More transparent credit card pricing paid by cardholders.

The stated interest rate used in the study was based on Federal Reserve data of the average stated purchase APRs across all credit card accounts. This is the interest rate most typically cited in the media. The actual interest rate paid was derived by totaling Federal Reserve data of the actual interest charges paid by cardholders, divided by the total amount of credit card debt accumulating interest charges across all credit card accounts.

Significantly, the numbers for the actual interest rate paid includes APRs other than just the purchase APRs — such as the typically much higher cash advance APRs and default penalty APRs. The resulting numbers provide a more accurate measure of the real interest rates paid on consumer credit card debt at different periods of time, say researchers.

“The primary difference between the two represents the gap between what issuers say a consumer will pay in interest and what they actually charge on average,” says Josh Frank, senior researcher at the Center for Responsible Lending and author of the study. “Any difference between these two rates is troubling because it would cause consumers to pay more than they had anticipated and, likely, to take on more credit card debt than they would have assumed given accurate disclosures.”

According to Frank, when you look at the actual amount paid by consumers, credit card interest rates, on average, were 0.75 percent lower by the second quarter of 2010 than they were when the bill was signed into law. Furthermore, according to the study, the gap between the stated credit card interest rate and the actual rate paid by cardholders has narrowed considerably since the bill was passed.

Before the Credit CARD Act of 2009 took effect, the APR offered in credit card solicitations was significantly lower than the actual interest charged to new cardholders after they received the card, say researchers. But, according to the study, this gap narrowed to a difference of just 0.2 percentage points in the wake of the Credit CARD Act — saving consumers more than $12 billion a year in “hidden” interest charges.

Fixed APR Balance Transfer Credit Cards: The Long Term Approach to ...

Source: articleage.com

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