While credit card issuers gnashed their teeth and took immediate steps to raise interest rates and implement new revenue streams last year, consumers who use credit cards waited in happy anticipation for the reforms to become effective on February 22, 2010.
And it turns out that those reforms really are helping consumers.
The number of borrowers who fell 90 days or more behind on credit card payments during the first quarter of 2010 dropped by nearly 16% – from 1.32% to 1.11% – over the same period last year. In addition, average credit card debt is down 10.6% from the same period in 2009.
Analysts believe that one reason for the drop in late payments is that banks can no longer raise interest rates on existing balances. Prior to the CARD Act, banks could hike interest rates with no real warning – causing minimum payments to jump at a time when many Americans were struggling with unemployment and reduced income.
Consumers can still be faced with small rate increases, depending upon the terms of their credit cards. One thing many credit card issuers did last year was to switch from a fixed rate to a variable rate tied to Prime. Thus, when the Prime rate rises, interest on those credit cards rises with it.
However, at least for now, the Prime rate is staying low and isn’t changing much from month to month. It’s a far cry from seeing an interest rate jump from 7.9% to 17.9% in one month.
The new law also curbed some of the fees banks charged. For instance, a consumer who went over-limit on a credit card account now pays just one over-limit fee per billing period rather than a separate fee for every transaction that took his or her account over the credit limit.
In the past, these over-limit fees increased consumer debt faster than many could pay it down.
The new law is also making it easier to pay down debt, by mandating that all payments above the minimum are credited to the highest interest balance first. Previously, a consumer might have a high interest purchase balance buried beneath a low-interest cash advance – where its interest charges continued to add to the debt month after month.
Of course, another reason for this decline is that Americans are working to rein in their debt. We’re working harder to live within budgets and to pay off credit accounts rather than acquire new debt. In fact, TransUnion reported that the number of new cards opened during the first quarter of 2010 was down 24% from the same period last year.
Author: Mike Clover
CreditScoreQuick.com
