Studies: Economy, Not CARD Act, Responsible for Interest Increases, Lack of Available Credit

It’s easy to jump to the conclusion that the Credit CARD Act has led to higher interest rates, as many—including the American Bankers Association—have done. After all, it was a commonly predicted side effect of this reformatory legislation, and interest rates have risen since the CARD Act was signed into law in May 2009. But is there really a connection between the law and the rising cost of interest? Does the law’s passage represent the cause and the interest rate hike the effect? Or is this merely a coincidence that stands to distort the CARD Act’s legacy and distract from the true foundations of currently high interest costs?

Simple intuition seems to favor the latter. People predicted that credit card companies would increase their interest rates both in anticipation of and in reaction to revenue lost due to CARD Act restrictions. However, given that issuers retained complete freedom to set interest rates following the law’s passage, the only revenue stream affected by the CARD Act was stemming from credit card fees.

Will Interest Rates Climb?

Increased interest rates will not be the avenue chosen by issuers to recoup this lost income because such a tactic would only be lucrative when applied to the accounts with the highest balances. This means that it would be tantamount to taxing the rich to compensate for the poor’s inability to pay high penalty fee amounts. When faced with such taxes, high balance account holders would simply move their business to credit card companies significantly unaffected by penalty fee restrictions, like American Express.

Still, instinct isn’t enough to make a conclusive ruling about the CARD Act’s ramifications. Actual corroborating data is needed, and a CardHub.com study found it. According to the credit card comparison website’s Q1 2011 Credit Card Interest Rate Study, interest rates after the passage of the CARD Act match historical trends and therefore reflect the influence of economic pressures rather than that of legislation.

Our Credit Card Rates Too High?

More specifically, by subtracting the Prime Rate from average monthly interest rates, Card Hub was able to isolate the margins and thus compare the interest credit card companies have charged over the past 20-plus years. This comparison showed that recent interest rates have risen as expected during a recession, but not to the point of abnormality. In fact, current interest levels are lower than historical trends say they should be. Therefore, it’s fairly obvious that the CARD Act is not to blame for high interest costs and that the Great Recession is.

Similarly, the economy is the reason that it has become more difficult to obtain credit over the last couple of years. According to the Center for Responsible Lending, “Available credit has not tightened beyond what would be expected from the economic downturn.” One indicator of this, according to the organization, is the fact that “direct-mail offers have been extended at a volume and pace consistent with economic conditions.”

In the end, the claims that the CARD Act led to relatively high interest rates and low levels of available credit cannot be substantiated. Neither intuition nor statistical analysis revealed any evidence to support either premise. Therefore, the CARD Act should not become a scapegoat for either problem; record high unemployment rates unseen since the early 1980’s, among other economic factors, should instead receive the blame.