Rising Interest Rates, Low Credit Availability: CARD Act Side-effects?
Credit card interest rates have risen during the Great Recession. Credit availability has lessened during this time. The Credit CARD Act was signed into law in May 2009, right before these trends peaked. Coincidence? Many people think not.
They believe that the CARD Act is directly responsible for the increasing cost of consumer interest and the decreasing availability of consumer credit. However, two recently released studies prove that there is no correlation between this credit card reform law and the unfortunate financial trends we have all witnessed and experienced throughout the past couple of years.
The “Credit Card Clarity” report from The Center for Responsible Lending and the Credit Card Interest Study conducted by CardHub.com both found that while interest rates and credit availability did indeed take turns for the worse, these trends occurred as a result of economic pressures typical of a recession, not because of the CARD Act’s influence.
Many CARD Act critics, including the American Bankers Association, asserted that credit card companies would increase their interest rates in order to recoup revenue losses incurred as a result of the law. However, the only revenue streams irreversibly-impacted by the CARD Act were those stemming from subprime credit card fees, and it’s highly unlikely that credit card companies would choose to cover these lost costs with higher interest rates because rate increases would only prove lucrative if applied to credit cards for excellent credit (i.e. high-balance accounts). Companies simply won’t risk alienating their best customers and losing them to companies like American Express who do not have to compensate for subprime fee losses.
So how are the recent interest rate hikes to be explained then? By viewing them in terms of history instead of in a vacuum. Card Hub did so and discovered that rising interest rates and falling credit availability levels are standard by-products of a recession. In fact, those which occurred during 2010 were less significant than the increases seen during the recession of 1992, when unemployment, credit card delinquency and credit card charge-off rates were lower than they are today. In addition, financial models that have accurately predicted past interest rates indicate that interest has not increased as much as it should have during the last year given the state of the nation’s economy during that time. The CARD Act cannot be responsible for high interest if the interest rate increases witnessed since its passage have been, by all accounts, mild for such a severe recession.
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