Next week marks the one-year anniversary of the Card Act’s passage into law, and this impending anniversary has already sparked reflection about its effectiveness. Experts and pundits have begun their postmortems on the oft criticised law and, as was the case prior to and during its short life, the most common refrain in hindsight is that while this piece of credit card reform legislation managed to foster greater transparency, it also increased interest rates and limited many consumers’ access to credit.
Unfortunately, these claims seem to reflect the political discourse surrounding both this law and the economy at large. Like it or not, the CARD Act has become a partisan issue. However, this reality should not distort the facts that are readily available, and the fact of the matter is: Indisputable data proves that the CARD Act did not increase interest rates.
Interest rates have increased since the CARD Act was signed into law in May 2009, but two independent studies show that there is no correlation between such changes and the legislation. Instead, Card Hub’s Q1 2011 Credit Card Interest Rate Study and the centre for Responsible Spending report titled “Credit Card Clarity: Credit Reform Works” indicate that heightened interest rates are merely a standard byproduct of the nation’s recent economic climate.
Card Hub made such a determination in part by comparing historical interest rate trends to recent data. By subtracting the Prime Rate from monthly average interest rate figures, one gains a time-adjusted sense of the interest rates that credit card companies actually set and control. Examination of these historical figures shows that the recent interest rate increase is fully attributable to the economic climate since it’s actually smaller than the rate increase seen during the less-severe recession of 1992.
In addition, Card Hub built a statistical model to predict what the interest rates should have been from May 1991 to November 2008 based on the Prime Rate as well as charge-off, delinquency and unemployment rates. This model predicted historical interest rate figures at 84 per cent accuracy. When it was applied to the time period after the CARD Act was put into effect, it predicted that the interest rate should have actually increased more than it has since the time the CARD Act was signed into law in May 2009.
The centre for Responsible Lending also closely examined various types of economic data and found that not only are consumers now paying the interest rates that they sign up for, recent interest rate increases and the drop in direct-mail credit card offers reflect nothing other than the fact that both unemployment and delinquency rates are at the highest they’ve been in the last 20 years.
Ultimately, in-depth statistical analysis really isn’t even necessary to surmise that the state of the economy, not the CARD Act, is truly responsible for the interest rate climb observed during the past year. The CARD Act did not inhibit the ability of credit card companies to charge whatever interest rates they so choose. It only prevented them from effectively advertising a certain interest rate, then changing it after an account becomes active. In fact, issuers can still increase interest rates, they simply have to provide customers 45 days notice and refrain from applying the increased rate to a preexisting balance until said customer is at least 60 days delinquent.
Even revenue lost as a result of the fee restrictions ushered in by the CARD Act does not provide a valid reason for an interest rate increase. Fees are most common on credit cards for people with subprime credit, while the majority of credit card company interest revenue stems from the superprime segment—the consumers with the highest credit lines. It doesn’t make sense for credit card companies to effectively lower the attractiveness of the offers geared toward their best customers in order to recoup losses incurred elsewhere. Credit card companies simply wouldn’t risk alienating superprime consumers and losing their business to issuers that do not offer subprime products and are therefore unaffected by fee restrictions.
Whether you look at it intuitively or statistically, it’s obvious that the CARD Act has neither increased interest rates nor limited consumers’ access to credit. Belief that it has is an obvious byproduct of political influence. No matter one’s particular political leanings or affiliations, they should not be relevant to the evaluation of this law. The effect of the CARD Act is quantifiable. It can be proven one way or another, and as a result, careful examination of actual evidence, not guesswork, should mark its one year examination. When such a strategy is implemented, it becomes clear that the initially-feared side effects of this reformatory legislation have, in reality, not been realised.
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