Many consumers may have had trouble paying off their credit card debt in recent months, and a new study has found that lenders are likely contributing to the problem with interest rates not seen since 2001.
According to new statistics published by market research firm Synovate, interest rates on credit card debt have climbed considerably over the last year or so, from 13.1 percent in the second quarter of last year to 14.7 percent for the same period this year. That rate is the highest level observed by the company since 2001.
A Wall Street Journal report on the figures said that they are especially troubling for consumers when compared to the prime rate – against which rates on credit card debt are set. The current difference of 11.45 percentage points is the largest in the last 22 years. On the other hand, differences in the rates for 10-year Treasury bonds and those on 20-year fixed mortgages are near historical averages.
The Journal report said that the increases are driven by a number of factors, but the primary reason is almost certainly the passage of the Credit Card Accountability, Responsibility and Disclosure Act last year. One provision of that law dictated that lenders could not increase rates or fees on the cards they issue without at least 45 days’ notice to consumers.
Further, the report said most lenders are dealing with delinquency and charge off rates that are higher than most historical averages, even despite recent drops. In the past, banks would boost rates immediately on any borrowers who fell behind on their payments. But even this is no longer possible unless a consumer makes late payments habitually.
Those two factors have led to banks setting higher initial interest rates on credit card debt to help preemptively stem the potential revenue losses from more lenient delinquency policies mandated by the Credit CARD Act, the report said.
"We can’t come up with penalty pricing or if we can, quite frankly, it’s too late to do much good," Stephanie Keire, head of consumer credit-card risk management at Wells Fargo & Co., told the paper.
The final rules of the Credit CARD Act went into effect on August 22. Now the maximum a lender can levy against a consumer is $25 for a first offense and $35 for any further instances within the next six billing cycles.