There's good news for credit-card users, according to a report today from the Pew Charitable Trusts: As promised, many of the credit-card industry's best-known tricks and traps for consumers were vanquished by last year's credit-card law.
The report looked at card data collected in March, and found that three of the law's prime targets were gone:
- "Hair trigger" shifts to penalty interest rates on existing balances, based on minor account violations such as being a day late on a payment, .
- Unfair payment-allocation schemes that trapped people who accepted "0 percent" interest rates on balance transfers into paying unexpected interest if they also used their new cards for purchases.
- Meaningless credit limits, in which banks allowed people to spend beyond their limits but then imposed unexpected "over-limit fees" on them.
"The elimination of these practices marks a major improvement" since Pew last studied the credit-card market a year ago, before most of the new law had been implemented.
Another piece of good news: As I've reported before, one of the dire predictions of bankers and their congressional allies didn't come true - that credit cards without annual fees would vanish. Believe it or not, Pew's data showed that slightly fewer cards this year imposed an annual fee - down to 14 percent of card offers, versus 15 percent - though the median annual fee for those few cards did rise, from $50 to $59 for bank cards and $15 to $25 for credit unions' cards.
Pew also found a trend away from overlimit fees - perhaps because they now require prior consent - and arbitration clauses.
So what's the bad news - the step backward implied in the new report's title "Two Steps Forward"?
Pew's summary focuses on several:
- Advertised interest rates have continued to tick upward since last July - except, that is, for cards issued by credit unions.
- Surcharge fees for cash advances rose sharply between July 2009 and March 2010, with the median rising from 3 percent to 4 percent - perhaps a way to generate more income from the cash-strapped unemployed and underemployed.
- Penalty interest rates, which can now only be imposed on existing balances if a customer falls at least 60 days' behind, remain common - they're specified in contracts for at least 94 percent of the bank cards that Pew surveyed, and 46 percent of the credit unions' cards.
- Pew says "a troubling new trend emerged" among some issuers to fail to disclose the size of penalty rates or what actions could trigger them, not to mention what consumers could do to escape them by behaving better, as the new promises. The report says the trend "runs counter to the Credit CARD Act's goals of transparency and simplicity." Among those it found, Pew said the median penalty rate had risen 1 percent, to 29.99 percent.
- The Federal Reserve, which has been writing the rules implementing the new law, punted on what the bill's backers said was a requirement to regulate penalty rates, which Pew believes should be limited to a surcharge of 7 percentage points. Pew said, "Unfortunately, the Federal Reserve recently refused to set rules to ensure that penalty interest rate increases are subject to its 'reasonable and proportional' standards, indicating its belief that Congress did not intend such regulations to exist."
By the way, if you weren't paying close attention, you might wonder about the role of the Pew Charitable Trusts in the credit-card arena.
Pew played a large - and largely unheralded - role in the reforms enacted last year. The Philadelphia foundation's Safe Credit Cards Project started out by trying to foster voluntary reform by the mega-banks that had come to dominate the industry. When its voluntary push seemed to stall, it became one of the most important advocates for a new law, in part because of its reputation for pushing for policies based on solid data and research.
Pew recognized the truth of what less-well-funded consumer advocates, and their academic allies such as Harvard bankruptcy expert Elizabeth Warren, had been arguing for years: that the tacit deregulation of consumer credit, spurred by a 1978 Supreme Court decision and that decade's high inflation, had given birth to a credit-card business built on tricks and traps.
The biggest trap was to offer consumers low-interest or no-interest loans, based on contracts that would allow some of their rates to be raised retroactively if they missed a deadline, were late on another bill, or even were late in paying another creditor. The banks had computer models showing that a significant portion of customers would fail on one of those grounds, and fail they did, often complaining bitterly that the penalty rates and fees were just pushing them deeper into a hole. Many card issuers even added clauses to their contracts that allowed them to change terms for no reason at all.
That tricks-and-traps model was finally recognized as unfair and deceptive by the Federal Reserve and Congress, and has been legislated away. The new law and rules may well be part of the reason that median rates have risen a bit - although the credit crisis, financial collapse and Great Recession are also part of the equation.
But if transparent and trick-free pricing means slightly higher pricing, it's a reasonable price to pay. And Pew deserves credit for helping make the case.