Rising APR’s Consequence of New CARD Act Legislation

13 October, 2010

In 2009 the Federal Reserve issued a set of guidelines in an effort to change the way that the credit card industry markets, advertises and communicates to cardholders. This law was designed to drastically reform the credit card industry and to protect consumers.

2010 has been a year of many changes in the financial arena. The credit card industry has been at the forefront of many new rules, regulations and changes that have taken place over the last year. The Credit Card Accountability Responsibility and Disclosure (CARD) Act is to blame for many of the changes; good and bad, that have affected the industry as a whole. A rise in annual percentage rates (APRs) is one thing that has become evident in 2010.

Out of these new regulations came some good changes and some not-so-good changes for consumers and credit card lenders.

The Good Changes

• Set limits on interest rate hikes.
• Rules guiding the marketing and issuing of credit cards to individuals under 21.
• Due dates for payments have become more standards and reasonable with identified time frames for when payments are due.
• Changes to the terms of the contract must be communicated to the cardholder 45 days in advance.
• There are now clear limits on billing cycles, over limit fees, late fees and minimum payments.
• Statements now include information that will ensure that cardholders have clear information about fees, balances and information relating to their account.
• Credit card lenders are required to follow a strict set of guidelines that govern the practice of fee setting, credit card regulation changes and communication with consumers.
• An overall increase in awareness and responsibility around credit card use.

The Not-So-Good Changes

• Prior to the legislation taking effect in early 2010, many consumers found themselves with increased card debt because lenders were making a last ditch effort to increase rates before the new rules were put into place.
• Lenders have become more selective in issuing credit cards to individuals with other than excellent or good credit making it more difficult to get approved for a credit card.
• There is the potential for a significant reduction in the no fee and low interest rate credit cards being offered.
• Those with less than excellent credit scores may be paying higher fees and have less opportunity to increase their credit rating.
• Restrictions on young adults under 21 being issued credit cards for college expenses.
• Annual percentage rates have increased.
• Rewards programs have become less attractive.

The CARD Act Is Complete

The last piece of the CARD act legislation went into effect in August of 2010. This final piece of legislation offers continued protections for consumers and includes gift card protections and reevaluation of changes to interest rates, fees and rate increases even if they are applied within the regulations.

Now that all phases of the CARD act have been rolled out consumers can anticipate seeing a rise in annual percentage rates and rewards programs that are a bit thriftier. Credit cards, especially retail cards have a variety of protections in place but a significant rise in APRs has also surfaced in recent months. Despite the CARD act there still appears to be the potential for consumers to pay heavy prices to be a credit cardholder.

Statistics

According to a recent survey, 19 of the 36 surveyed retail credit cards had APRs of 23% or higher as compared to the 11 just last year in 2009. Cards sponsored only by a retailer are known as non-co-branded cards and those sponsored by both a retailer and a bank are known as co-branded cards. Of both of these cards the non-co-branded cards seemed to have the higher APRs, some that reached the 25% mark.

Although the CARD act has made many changes the rising APR’s on cards are thought to be a consequence of the new legislation. Rewards programs have also taken a hit. The APR epidemic is expected to level off in the next year or so, according to reports, however until it does, many cardholders, especially those holding retail cards can expect an APR somewhere in the 20% range.

Credit Cards Plus