Anniversaries are always a time for reflection, reflection that lends itself particularly well to gauging progress. As February 22 marks the CARD Act's one-year anniversary, the time for reflection and evaluation of the law's effectiveness is upon us.
Has this sweeping piece of reformatory legislation increased transparency throughout the credit card industry? Has it led to increased interest rates and less available credit, as many predicted prior to its passage?
First of all, there is no one who denies the fact that the CARD Act has increased industry transparency. Even representatives of the American Bankers Association, which has been outspoken against certain aspects of the CARD Act, said in a statement that "consumers now benefit from greater transparency and control over their card accounts."
However, many -- including the ABA -- believe the CARD Act to be responsible for increasingly high interest costs. This week, two studies provided quantitative insight into this contention. According to Card Hub's Credit Card Interest Rate Study and the Center for Responsible Lending report titled "Credit Card Clarity: Credit Reform Works," the observed interest rate increase following the law's passage came as a result of the economic downturn rather than law itself.
Interest rates that consumers are charged on credit card offers are usually comprised of two segments, the Prime Rate, which is effectively set by the Federal Reserve, and the margin, which is set by the credit card company. During a recession, the Fed will usually lower the Prime Rate in an attempt to stimulate the economy, while credit card companies increase the margins in order to protect themselves financially from increased defaults. As expected, this has taken place during the Great Recession, and it is this normal economically-dictated shift that caused interest rates to rise, not the CARD Act.
In fact, historical financial data shows that recent interest rate increases were not as severe as those which occurred during the recession in 1992, when there was less unemployment and fewer credit card defaults than there have been during the last year. Furthermore, a statistical model developed by the Card Hub team predicted that the interest rate increases seen following the passage of the CARD Act were actually not as significant as they should have been given underlying economic factors like unemployment, credit card charge-offs and credit card delinquency.
Economic pressure is ultimately a far more logical explanation for the interest rate increase as the CARD Act does not restrict the interest rates credit card companies can charge. The only revenue it stands to cut is that from fees on subprime credit cards, and issuers are unlikely to choose increased interest rates as a means of recouping such losses because this strategy would only prove lucrative if applied to accounts with high credit balances--those of prime and superprime consumers. No credit card company wants to lose the business of such sought-after consumer segments.
Therefore, February 22 -- the CARD Act's one-year anniversary -- should be a day to celebrate increased transparency for millions of credit card users. It should not be a day marred by misguided critiques and mistakenly placed blame for problems that occurred, in reality, as a result of the nation's economic troubles. At the end of the day, as surprising as it might be, the CARD Act will be a law that solved problems without creating new ones, leading to an ultimately net positive effect for consumers and the nation's healthiest credit card companies alike.