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Credit card interest rates leveling off and penalties decline under new law

May 18, 2011

| Money Rates Columnist

Despite warnings that credit card rates would balloon after recent federal credit card legislation, a new study has found that interest rates on bank credit card balances are leveling off and most fees for late payments and the like are declining.

The report from the Pew Charitable Trusts Safe Credit Cards Project found that interest rates for purchases on credit cards issued by banks remained unchanged, ranging from 12.99 to 20.99 percent, based on a customer's credit history. Rates charged by credit unions increased somewhat but remain between 9.99 percent and 17 percent.

Charges for late payments have dropped from a median of $39 two years ago to $25 to $35 for the 300 different consumer credit cards offered in March 2010 and January 2011. Late fees, however, were just as common.

Changes required by law

The Credit Card Accountability Responsibility and Disclosure Act was signed into law in May 2009 and limited how much credit card companies can charge for late fees. It also banned most interest-rate increases in the first year that you apply for credit and get a card. Credit card companies can't charge first-time offenders more than $25 for paying the bill late, and the maximum rate for additional late payments within six months was capped at $35.

Banks initially raised interest rates leading up the enactment of the new Federal Reserve rules, so the fact that the best credit card rates have stabilized was seen as good news by Pew researchers.

The study examined credit cards offered by the nation's 12 largest banks and 12 largest credit unions. Combined, those institutions manage 90 percent of the market, including low rate credit cards.

Other fees remain at previous levels

Among the other findings in the Pew report:

  • Annual fees remained unchanged at $59 on average for a bank credit card.
  • The percentage of bank credit cards charging an annual fee increased from 14 percent to 21 percent.
  • Charges for cash advances, balance transfers and international charges changed only slightly.

According to the Associated Press, the Pew study failed to note that when you apply for credit cards you typically get a variable rate, which means that you will pay higher interest rates if the prime rate goes up.

In addition to the number of late payments remaining steady, the amount of revolving debt, including credit card debt, in the country increased to $1.9 trillion. According to Bloomberg News, that's the second increase in four months and a sign that people are starting to use their credit cards again.

Charge-offs show decline

Credit card companies are also seeing a sharp decline in the number of charge-offs, which are the loans they don't expect to collect. According to Moody's Investors Service, charge-offs in the U.S. will fall to a 20-year low by the end of next year.

While this could be a sign that credit card users are doing a better job of paying off their balances, the declining charge-off rate is more likely a reflection of these companies no longer extending credit to weak borrowers and focusing instead of those with higher credit scores and a more dependable record of paying their bills on time.

At its high point in the first quarter of 2010, the credit card companies' charge-off rate was 11 percent. By the first quarter of 2011, it had dropped to 7.5 percent, and is expected to reach 4 percent by the end of 2012, Moody's said.

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