The Good, Bad and Worrisome News About Credit Cards
The Good, Bad and Worrisome News About Credit Cards
There's good news for many existing and wannabe credit card holders:
Fees are lower; there's more transparency and less confusing pricing;
the all-in costs of cards are, if not dropping, holding steady, and more
consumers seem to be getting access to credit than they were two years
ago.
Those are the highlights from the biennial consumer credit
card market report from the Consumer Financial Protection Bureau (CFPB).
It's encouraging news, although there are still significant pockets of
regulatory worry, including interest-free loans made on private label
credit cards for big purchases.
Here are some of the report's main takeaways:
The cost of credit is staying lower, and the percentage of monthly balances paid is up
The
CFPB looks at the overall ratio of card fees to the size of account
balances to get a sense of the cost of credit. That ratio remains well
below where it was before the CARD Act brought costs down. Consumers
"continue to pay less in fees, both absolutely and relative to their
balances, than before the implementation of the CARD Act," the report
says. Some card issuers have actually begun to compete based on their
late fees1. Also,
before the recession the share of total beginning balances that were
paid off in a given billing cycle was about 20 percent overall. As of
the beginning of 2015, that number was up to 27 percent.
There are more rewards programs
There's
now a wider array of rewards programs and many of them are "more
compelling value propositions" than were previously available, according
to the report. The potential fly in the ointment here is that consumers
may not be clear on how some of the partnerships that are often part of
rewards programs work. That makes it harder to evaluate whether a
rewards program is a good deal.
Interest-free loans on private label cards are a worry
Who
hasn't seen television ads for zero percent financing on furniture or
other larger-ticket items? While credit card pricing has
generally become easier to understand, the CFPB singles out this area as
"the most glaring exception to the general post-CARD Act trend towards
upfront credit card pricing."
The report notes that those who
don't pay off the loan before the promotional period is over generally
pay an interest rate of about 25 percent, which can lead to very painful
interest charges.
Cards from issuers specializing in weaker borrowers are very costly
Subprime
credit cards are often offered pre-approved through direct mail and
geared to those with problematic credit. Subprime specialist credit card
issuers charged consumers fees and interest that was more than 40
percent of those borrowers' year-end balances in 2013 and 2014. The CFPB
notes that "despite offering longer and more complex credit card terms
than mass market issuers, they [subprime speciality card issuers] send
those mailings disproportionately to consumers with lower levels of
formal education."
For consumers who get cards through these
subprime specialists, which the report stresses represent a minority of
issuers to subprime borrowers, the total cost of credit "is almost twice
the level experienced by consumers with weaker credit scores who have
credit card products from larger, mass issuers."
Consumers might not be ready for rising interest rates
When
the Federal Reserve eventually raises interest rates, credit card rates
will rise as well. The CFPB's concern is that some consumers used to
lower, stable rates may have been accumulating balances on their cards
and will be in for a financial shock. The example the report uses is
based on a consumer carrying over $15,000 in credit card debt at an
average rate of 12 percent. A one percentage point rise in rates would
add $12.50 to monthly payments, and add up to almost $150 in additional
charges over a year.
Post a Comment