Report: More Card Issuers Should Disclose Penalty Rates

Federal regulators should enforce rules requiring credit card issuers to disclose penalty interest rates, and prohibit them from imposing higher rates than disclosed initially to consumers.

That was the key recommendation from Pew Health Group’s “Safe Credit Cards Project,” which recently conducted a study on the impact of the credit card reform laws that mostly took effect Feb. 22 of this year.

The Pew study found that at least 94 percent of bank cards and 46 percent of credit union cards carry provisions stating that interest rates can go up as a penalty for late payments or other violations. 

And, most significantly, nearly half these warnings failed to inform the consumer of the actual penalty interest rate or how high it could climb, the report said. 

“Although we applaud changes by the card industry to create a fairer and more transparent marketplace, our research shows that some challenges remain,” said Nick Bourke, director of Pew’s Safe Credit Cards Project and report co-author. “For the first time, we have seen credit card disclosures warning consumers that interest rates could go up as a penalty for certain actions, but not stating how high those rates could go.”

The Pew report found s that surcharge fees for cash advances rose sharply between July 2009 and March 2010. Bank cash advance and balance transfer fees increased on average by one-third during this period, from 3 percent of each transaction to 4 percent.  Credit union cash advance fees went up by one quarter, from 2 percent to 2.5 percent. 

The consumer advocacy organization, Pew Charitable Trusts, oversees the project. Its most recent analysis of credit card trends also found several positives, including: 

• Practices including “hair trigger” penalty rate increases, unfair payment allocation, and over-the-limit fees – without prior consent – are a thing of the past. 
• Less than 25 percent of all cards examined had an over-the-limit fee, which is down from more than 80 percent of cards in July 2009. 
• Mandatory arbitration clauses, which can limit a consumer’s right to settle disputes in court, are now found in 10 percent of cards compared to 68 percent in July 2009.
• There was minimal change in the number of cards that include an annual fee (down 1 percentage point from July 2009 to March 2010).

The study, Two Steps Forward: After the Credit CARD Act, Cards Are Safer and More Transparent—But Challenges Remain, is the latest in a series of reports that has examined all credit cards trends offered online by the nation’s 12 largest banks and 12 largest credit unions.