In 2007, the Pew Charitable Trust launched the Safe Credit Card Project; an ongoing study which analyzes industry practices and how they affect consumers. On October 28th, the project released their monthly report
which discusses an alarming trend among bank-issued cards: circumventing the Credit Card Reform Act of 2009 by shifting to variable-rate APRs which are tied to the Prime Rate. This practice allows issuers to raise interest rates under circumstances which would normally not be permitted.Data on Variable Rate Cards
According to the study – which encompasses over 400 credit cards – as of December 2008, 31% of bank-issued credit cards had fixed rates. The current report states that number is now less than 1%.
For now, this trend does not apply to cards issued by credit unions; as of July, 64% of their cards continue to offer fixed interest rates on purchases.Minimum Rate Requirements
Furthermore, a growing number of creditors are implementing Minimum Rate Requirements (MRR). This practice sets a minimum benchmark APR; preventing the variable rate portion from falling below a predetermined level, even if the index it is tied to (such as the Prime Rate) moves lower.Future Implications
Considering that the U.S. Prime Rate is at a historically low level of only 3.25%, interest rates on almost all bank-issued credit cards are poised to increase in the future. During rampant inflation in the seventies and eighties, the Federal Funds Rate reached double-digits; peaking as high as 21.50%
on December 19th, 1980. Although that event was an anomaly, the historical median prime rate is 8.75% and the cumulative average is 9.842%... both of which are significantly higher than today.
Similar to the adjustable-rate mortgage collusion which has recently unraveled, consumers are now leveraging credit cards to pay for tuition, medical bills, and other expenses with the assumption their APR will remain relatively consistent as they pay down the balance. Although the economic consequences of this problem dwarfs in comparison to the mortgage debacle, it is a potential time bomb nonetheless. In turn, some of today’s credit card reviews and marketing campaigns are not only misleading the public, but also perpetuating the problem.
Labels: CCF, credit_card_reform, credit_cards, prime_rate