Monday, August 23, 2010

Credit Card Control Blow Back: Credit Card Rates at Nine Year High

New regulations are now enforce to "help" consumers.

As of Sunday, the new regs limit banks' ability to charge penalty fees.  Other regs have already kicked in limiting banks' ability to adjust rates quickly. The result: As all other interest rates are falling dramatically, rates on credit card debt are climbing.

WSJ reports:

In the second quarter, the average interest rate on existing cards reached 14.7%, up from 13.1% a year earlier, according to research firm Synovate, a unit of Aegis Group PLC. That was the highest level since 2001.

Those figures look especially stark when measuring the gap between the prime rate—the benchmark against which card rates are set—and average credit-card rates. The current difference of 11.45 percentage points is the largest in at least 22 years, Synovate estimates...

Banks used to boost rates in a hurry on borrowers who fell behind on payments or otherwise turned out to be surprisingly risky. However, under the Card Act, financial institutions must warn customers at least 45 days before making substantial changes to rates or fees....Now bank executives say they need to be smarter when setting the initial interest rates on credit cards. In many cases, that means starting off with a higher rate. "We can't come up with penalty pricing or if we can, quite frankly, it's too late to do much good," says Stephanie Keire, head of consumer credit-card risk management at Wells Fargo & Co...More increases are looming as card issuers respond to the new penalty-fee limits, says Ken Paterson, vice president of research at Mercator Advisory Group...Bank of America now is more likely to offer customers with large deposits at the bank a lower rate, higher credit limit or better rewards than similar borrowers it knows less about...Meanwhile, lenders are quicker to reduce credit lines at the first signs of financial stress, including late payments on other bills, a pay cut and unemployment...

Most cards now carry variable rates, meaning any increase in the prime rate is likely to be quickly passed along to borrowers. "Consumers will end up getting squeezed" when the Federal Reserve begins to raise rates as the economy recovers, says Ben Woolsey, director of marketing and consumer research at
The negative implications of the credit card regulations are easy to spot. But, there are tons of new rules in the Dodd-Frank Financial Bill that likely have just as distorting an impact as the credit card regs, maybe even greater. The total amount of economic suffocation this will all bring is unquantifiable. But it should start getting obvious that in addition to Fed money supply manipulations, there are a lot of reasons most sectors of the economy are at best stagnant.

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