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Study: 2 Years After Credit Card Reforms, Rates, Fees More Stable

Credit card interest rates have held steady, penalties are less costly for consumers and annual fees and other charges have changed little over the past year, according to a study released Tuesday by the Pew Safe Credit Cards Project.

"The products are safer and more transparent than they were before," says Nick Bourke, director of the nonprofit project that has tracked credit card terms, including interest rates and fees, since 2008. Pew's report was released just ahead of the two-year anniversary of landmark credit card reforms signed into law May 22, 2009, by President Obama. Bourke says Pew researchers want to know how the Credit CARD Act of 2009 has impacted consumers and if it is doing what lawmakers intended.

Among other things, the law eliminated surprise interest rate hikes, capped late fees and banned billing and payment practices deemed unfair and deceptive by federal regulators and consumer groups. Although the law was enacted nearly two years ago, the bulk of the major consumer protections did not take effect until Feb. 22, 2010. (See CARD Act time line).

300 cards examinedPew examined terms and fees for more than 300 credit cards issued by the top 12 banks and top 12 credit unions. Together, these lenders account for more than 90 percent of all outstanding credit card balances. The data is current as of January 2011 and compares that data to rates and terms advertised in credit card solicitations from March 2010. The study compared:

  • Interest rates. The median advertised interest rates on bank-issued credit cards was unchanged between 2010 and 2011: 12.99 percent to 20.99 percent, depending on applicants' creditworthiness. Rates for bank cash advances and penalty interest rates were also unchanged. Cards issued by credit unions, however, showed a slight increase in rates. The lowest advertised rates for those cards were 9.99 percent and the highest rates were 17 percent. Cash advance rates on credit union cards declined over the year.
  • Penalty charges. In 2010, the Federal Reserve capped credit card late fees at $25 for occasionally late payments and $35 for repeat offenders. Because of this restriction, penalty fees have dropped from a median of $39 previously to a range of $25 to $35 for banks and just $25 for credit unions. Late fees continue to be nearly universal, charged on more than 95 percent of the cards reviewed.
  • Over-limit fees. Over-limit fees, charged when customers exceed their credit limits, have dropped dramatically in the past two years. The study found only 11 percent of banks still charge over-limit fees -- down from 23 percent in 2010 and more than 80 percent in 2009. According to Pew, the largest credit unions no longer charge over-limit fees. The CARD Act requires lenders to get cardholders' permission -- called opting in -- for over-limit fees. As a result, many lenders have abandoned the fee altogether. 
  • Annual fees. The percentage of bank-issued credit cards with annual fees rose slightly between 2010 and 2011, from 14 percent to 21 percent. Banks charged a median of $59 a year, which was unchanged from the previous year. Credit union cards saw no change in the prevalence of annual fees (which was 14 percent both years) or the median amount, $25. The report notes that 40 percent of all credit cards reviewed had promotions that waived the annual fee for the first year.

Bourke said that while some industry observers and banking lobbyists had predicted that the law would cause everyone's interest rates to spike and reinstate annual fees on accounts, those outcomes have not happened. "Only one in five credit cards include an annual fee, and the size of that fee has barely moved," Bourke notes. Advertised interest rates went up in the months following enactment of the law as banks and credit unions tried to assess the impact the regulations would have on their business models. However, rates have held steady in the past year. (The CreditCards.com Weekly Credit Card Rate Report has shown this as well, with rates being largely static for most of 2011.) As for those dire predictions, "So far, that has not panned out," Bourke says.

"What we are concluding from this is the credit card market really has stabilized," Bourke says. "The Credit CARD Act was very effective at changing the practices that it targeted while not shutting the credit card market down or causing serious changes."

The Pew results mirror those of other recent studies showing more transparent, consumer-friendly credit cards since the law took effect. The only official government assessment of the law's impact was released in February 2011 by the Consumer Financial Protection Bureau. That report noted that credit card terms had improved, and the new law had helped consumers, but confusion over complex terms still lingered. In its annual report on consumer complaints, the Federal Trade Commission reported that complaints about credit cards dropped 26 percent between 2009 and 2010.

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