You probably didn’t need the Wall Street Journal to tell you that credit card interest rates have been going up. They blame the CARD Act for cutting down on fee revenue, forcing the banks to raise interest rates, along with an increase in delinquencies.
This Is How It Was Supposed To Work
While the Consumerist is snarky in it’s condemnation of the CARD Act as the evil behind the new interest rates, the truth is that the rates are not such a bad thing. First of all, the current average is 14.7%, up from 13.1%, a significant, yet modest increase. While it sounds terrible to say that they are at a five year high, another way of looking at it is that the rates are lower than they were in 2001, back when we didn’t enjoy the protections of the CARD Act. Anyone wish to return to double cycle billing?
The fact is that the CARD Act has always been seen as a trade off. Banks have to stop with their deceptive tricks and traps, yet they were going to raise their interest rates up front to make up the differences. According to one legislator:
The sponsor of the Card Act, Rep. Carolyn Maloney (D-NY), said that despite the rising rates, the law benefits consumers because it eliminates unwelcome surprises and provides them with a clear picture of the costs they will face. “Better that consumers should know up-front what the interest rate is, even if it’s higher, than to be soaked on the back-end by tricks and hidden fees.”
My sentiments exactly. Actually, one could make the argument that in the absence of double cycle billing, some people are actually paying less interest than before even if you take into account the higher interest rate. With double cycle billing, you paid interest on the average daily balance over the last two billing cycles. Even if you have already paid the principle of the principle from the previous billing cycle, you are still paying interest on it. It is not hard to see how people who occasionally carry a balance are now paying less, despite a higher interest rate. With double cycle billing abolished, they now only pay interest on their current balance, not previous balances.
How Consumers Have Responded
For a variety of reasons, credit card debt has dropped to an eight year low. The factors vary from reduced income during the recession to the extra cash people may have when they stop paying their mortgage. I would suggest that a recent increase in debit card use points to a general atmosphere where people in this country do not want to carry debt. This is consistent with the behavior of consumers who might be employed, but are otherwise uncertain of their economic future.
How has the economy and the recent legislation affected your credit card use?
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