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 fees 1 The average late fee is $27. . 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.