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Credit Card Interest Rate Repricing Study – 2012

CardHub-2012-Interest-Rate-Repricing-StudyWe’re all aware that certain credit card companies engaged in a number of shady practices prior to the Great Recession, and many of us even experienced them first hand.  For everyone else, the ultimate impact of unscrupulous money-making tactics such as hair-trigger repricing (changing the terms of a credit card account for little or no reason, leaving consumers stuck with very different terms than those for which they applied) could easily be overlooked.  According to a study from the Center for Responsible Lending, penalty interest rates applied to nearly 11% of all credit card balances in 2008, though most accountholders weren’t even aware their rates had increased.  This did not tend to be a small increase either.  The study found that the average amount by which penalty rates exceeded regular rates more than doubled from 2001 to 2007, and by 2008, the average gap had reached 16.9 percentage points.  This cost the average household almost $2,000 in interest each year.

In order to eliminate such tricky and expensive issuer ploys, Congress passed the Credit CARD Act of 2009.  Among the law’s provisions is a rule against interest rate increases being applied to existing balances unless a cardholder becomes at least 60 days delinquent, a variable rate’s index changes, or there is a workout agreement in place.  Furthermore, credit card companies have been banned from raising interest rate terms (including those for new transactions) during the first 12 months an account is open in the absence of a consumer being 60 days late making a payment, an introductory rate expiring (must be in place for at least six months), a change to an index such as the Prime Rate, or a cardholder’s failure to make payments as dictated by a debt management program.  If they do apply the Penalty APR to an existing balance, issuers must repeal the change on those existing balances if a customer makes the next six consecutive on-time monthly payments.  When issuers increase interest rates on new transactions, they have to review the account every six months thereafter in order to determine eligibility for a decrease.

The Federal Reserve subsequently provided a sample disclosure box and later a set of disclosure instructions that outline how credit card issuers are expected to disclose the aforementioned legislative changes to consumers.  These directives together provide issuers with safe harbor under the eyes of the law and as such constitute the only standard by which issuers’ practices can be judged.  Card Hub’s 2012 Credit Card Interest Rate Repricing Study therefore evaluated how good of a job issuers are doing in adhering to the example provided them by the Federal Reserve.

Furthermore, the Study analyzed how effective regulatory standards are in not only implementing CARD Act regulations, but also in ensuring that consumers clearly understand interest rate repricing terms at the time they apply for a credit card.  After all, it is far more important that issuers follow a good example than merely an example from a good source.  More specifically, there are two regulatory standards currently in existence.  The first, which is currently in use, is comprised of the sample disclosure box and disclosure instructions that were originally developed by the Federal Reserve and are now owned by the Consumer Financial Protection Bureau (CFPB).  The second is a prototype disclosure, which was developed by the CFPB and is currently available for public comment.

The following can be found below:

KEY FINDINGS

  • The Federal Reserve has set an embarrassingly low bar for issuer disclosures, as evidenced by the 7.5% score its model disclosure received in this study.
  • The Consumer Financial Protection Bureau obviously recognized the inherent flaws with the Federal Reserve’s implemented guidelines for credit card disclosures and created its own proposal, which received a score of 85% and is open for public comment.
  • While the CARD Act successfully improved transparency and consumer rights throughout the credit card industry, regulatory guidance directs issuers not to disclose some of the most important changes, including the following:
    • Interest rate increases of any kind are prohibited during the first year an account is open unless a promotional rate concludes (must be in place for at least six months), the cardholder is at least 60 days delinquent, a variable rate’s index changes, or there is a workout agreement in place.
    • Rate increases may never be applied to existing balances unless a cardholder is at least 60 days delinquent, a variable rate’s index changes, or there is a workout agreement in place.
    • Issuers are required by law to remove a Penalty APR from an existing balance if a cardholder makes on-time payments for the next six months following a rate increase.
  • As one would expect, all of the major credit card issuers use disclosures that are at least on par with the Fed’s model.  Two issuers – namely American Express and Bank of America – provide additional information on top of what regulators recommend in order to further consumer understanding.
  • 70% of major credit card issuers use Penalty APRs.
  • USAA, U.S. Bank, and Wells Fargo are the only major issuers that do not use Penalty APRs at all.  Bank of America also deserves credit, as it explicitly states that it only applies Penalty APRs to new transactions.

SUMMARY OF RESULTS

 

  Clarity on Portion of Balance Affected Clarity on APR Changes During First 12 Months Clarity on How to Get Back to Regular Rate Overall Rating Uses Penalty APR?
Issuers
American Express Above Par On Par Above Par Above Par Yes
Bank of America Above Par On Par On Par Above Par Yes (only on new transactions)
Capital One On Par On Par On Par On Par Yes
Chase On Par On Par On Par On Par Yes
Citi On Par On Par On Par On Par Yes
Discover On Par On Par On Par On Par Yes
Barclaycard US On Par On Par On Par On Par Yes
U.S. Bank On Par On Par On Par On Par No
USAA On Par On Par On Par On Par No (Clearly Disclosed)
Wells Fargo On Par On Par On Par On Par No
Regulators
Federal Reserve Poor Fair Poor 7.5% N/A
Consumer Financial Protection Bureau Good Good Poor 85% N/A

METHODOLOGY

Issuers vs. Federal Reserve:

When available, the study examined three different* credit card applications from each issuer, as the terms and conditions on the applications are what consumers see before they apply for a credit card.  Each issuer’s policy was rated based on the following factors:

Portion of Balance Affected: According to the Federal Reserve, “If a rate may increase as a penalty for one or more events specified in the account agreement, such as a late payment or an extension of credit that exceeds the credit limit, the card issuer must disclose the increased rate that would apply [and] a brief description of the event or events that may result in the increased rate.”  However, the Fed also advises that, “An issuer may not distinguish between the events that may result in an increased rate for existing balances and the events that may result in an increased rate for new transactions.”

APR Changes During First 12 Months: The Federal Reserve does not provide guidance regarding the disclosure of interest rate changes during the first 12 months.  It instead focuses on changes to the introductory rate, saying, “An issuer is required to disclose directly beneath the table the circumstances under which an introductory rate … may be revoked, and the rate that will apply after the revocation. …  The description of the circumstances in which an introductory rate could be revoked should be brief. For example, if an issuer may increase an introductory rate because the account is more than 60 days late, the issuer should describe this circumstance directly beneath the table as ‘make a late payment.’”  Given that not all cards have introductory rates and those that do may only have intro rates spanning a portion of the first year an account is open, these disclosure guidelines are not universally applicable.  We therefore focused our evaluation on disclosures related to first-year APR changes.

How to Get Back to Regular Rate: According to the Federal Reserve, “The description of how long the increased rate will remain in effect also should be brief. If a card issuer reserves the right to apply the increased rate to any balances indefinitely, … the issuer should disclose that the penalty rate may apply indefinitely.”  Regulation Z further states that issuers do not need to disclosure their obligation to revert back to the regular rate if a cardholder makes the next six consecutive periodic minimum payments on time following a rate increase.

Each factor was assigned a designation of “On Par,” “Above Par,” or “Below Par” based on our subjective evaluation of how well it compares to the Federal Reserve’s model disclosure box and other requirements in the rules.  Based on these findings, each issuer’s overall interest rate repricing policy was then given a final designation of “On Par,” “Above Par,” or “Below Par.”

*It is important to note that certain issuers offer some cards that have Penalty APRs and others that do not.  We certainly laud these issuers for at least abolishing Penalty APRs on some of their credit cards, but given that the focus of this study was on how well issuers disclosed the intricacies of their Penalty APR policies, we focused on the subset of cards that do have them.

Regulators vs. Card Hub Ideal Penalty APR Disclosure:

We felt it important to analyze regulatory guidance provided by the Federal Reserve – its sample disclosure box and its final rulemaking [§ 1026.60(b)(1)(5)], as this is what sets an example for issuers and can explain many of their shortcomings and/or strengths.  We also evaluated the Consumer Financial Protection Bureau’s prototype disclosure to assess its effectiveness relative to the Federal Reserve’s guidance.  We based this analysis on our subjective evaluation of how well they compare to the Card Hub Ideal Interest Rate Disclosure.  More specifically, the guidance was rated based on the following factors:

Portion of Balance Affected: The ideal disclosure clarifies which triggers affect which portion of a credit card balance. There are two types of triggers – one type affects new transactions, and the other can affect both new transactions and an existing balance. The only trigger that can affect your entire balance (including an existing balance) is a cardholder becoming 60 days or more delinquent in making a payment. All other triggers (e.g. making one late payment or going over the credit limit) can only affect new transactions. The Federal Reserve and the Consumer Financial Protection Bureau were rated based on the extent to which they clearly disclosed this information.  The highest possible score for this factor was 70 points.

APR Changes During First 12 Months: The Credit CARD Act stipulates that the Penalty APR or any other changes to interest rate terms cannot be applied to a credit card account in the first year that the account is open, unless the cardholder is 60 days delinquent. The Federal Reserve and the Consumer Financial Protection Bureau were rated based on the clarity with which they disclosed this information.  The highest possible score for this factor was 15 points.

How to Get Back to Regular Rate: By law, making timely payments for the six consecutive months following the rate increase will remove the Penalty APR from transactions made prior to the 14 days after a consumer got the notice of the rate increase (in simpler words, existing transactions). If a consumer does not make the requisite six consecutive payments during the allotted time, the Penalty APR may apply indefinitely.  A penalty APR may also apply indefinitely to new transactions.  The Federal Reserve and the Consumer Financial Protection Bureau were rated based on their disclosure of this information.  The highest possible score for this factor was 15 points.

Each factor was assigned a designation of “Good” (70/70 or 15/15), “Fair” (35/70 or 7.5/15), or “Poor” (0/70 or 0/15).  “Good” denotes that the regulators’ model disclosures clearly reflect the protections written into law by the CARD Act and is on par with the Card Hub Ideal Interest Rate Disclosure.  “Fair” means that the regulators’ model disclosures provide some of the most important information that consumers need to know regarding the CARD Act’s protections but are somewhat less effective than the Card Hub Ideal Interest Rate Disclosure.  “Poor” indicates that the information contained in the regulators’ model disclosures is either obviously incomplete or misleading.

DETAILED FINDINGS

DETAILED RESULTS BY ISSUER:

American Express – Overall:  Above Par

  • Clarity on Portion of Balance Affected: ABOVE PAR – American Express states what the Penalty APR is and the conditions under which it will apply (e.g. if you make a late payment or a payment is returned to you).  In addition, American Express adds that, “The Penalty APR will apply to existing balances only if a payment is more than 60 days late,” which is relevant information that is helpful to the consumer but not required by regulators.  As a result, this aspect of Amex’s disclosure is superior to regulatory guidelines.
  • Clarity on APR Changes During First 12 Months: ON PAR – American Express does not explicitly mention the circumstances under which it can increase an APR during the first 12 month, instead stating that, “We may end your Introductory APR and apply the Penalty APR if you do not pay at least the Minimum Payment Due within 60 days after its Payment Due Date.”  It therefore is “On Par” with regulatory guidelines, as they do not require disclosure of information related to first-year interest rate increases.
  • Clarity on How to Get Back to Regular Rate: ABOVE PAR – American Express notes that, “We review your Account every 6 months after the Penalty APR is applied. The Penalty APR will continue to apply until after you have made timely payments during the 6 months being reviewed.”  It therefore provides more detail than federal regulations require, which should be viewed favorably.

Bank of America – Overall:  Above Par

  • Clarity on Portion of Balance Affected:  ABOVE PAR – Bank of America states what the Penalty APR is and the conditions under which it will apply.  Bank of America also explicitly states that it does not apply a Penalty APR to existing balances, which means BofA is going above and beyond regulatory guidelines, which recommend not distinguishing between Penalty APRs for existing balances and new transactions.
  • Clarity on APR Changes During First 12 Months: ON PAR – Bank of America does not mention the fact that it can only increase interest rates during the first 12 months if a cardholder is at least 60 days delinquent, which means it is “On Par” with regulatory guidelines.
  • Clarity on How to Get Back to Regular Rate: ON PAR – Bank of America states that, “If your APRs are increased, the Penalty APR will apply indefinitely.”  It is therefore following regulatory guidance.

Capital One – Overall:  On Par

  • Clarity on Portion of Balance Affected:  ON PAR – Capital One states what the Penalty APR is and the fact that the Penalty APR “may be applied to your account if you make a late payment.”  This satisfies the Federal Reserve’s requirement that issuers disclose a brief “description of the specific event or events that may result in an increased rate.”
  • Clarity on APR Changes During First 12 Months: ON PAR – Capital One does not explicitly mention the circumstances under which it can increase an APR during the first 12 month, instead stating that:  “We may end your introductory APR and apply the Penalty APR if you make a late payment.”  It therefore is “On Par” with regulatory guidelines.
  • Clarity on How to Get Back to Regular Rate: ON PAR – Capital One states that, “If APRs are increased for a payment that is late, the Penalty APR may apply indefinitely.”  This is in accordance with the Fed’s directive that, “If a card issuer reserves the right to apply the increased rate to any balances indefinitely … the issuer should disclose that the penalty rate may apply indefinitely.”

Chase – Overall: On Par

  • Clarity on Portion of Balance Affected: ON PAR – Chase states the Penalty APR that will apply and the things that will trigger it.  Chase is therefore acting in accordance with regulatory guidelines.
  • Clarity on APR Changes During First 12 Months: ON PAR – Chase does not explicitly mention the circumstances under which it can increase an APR during the first 12 month, instead stating that, “We will end your introductory APR if any required Minimum Payment is 60 days late, and apply the Penalty APR.”  It is therefore “On Par” with regulatory guidelines, as they do not require disclosure of information related to first-year interest rate increases.
  • Clarity on How to Get Back to Regular Rate: ON PAR – Chase states, “If your APRs are increased for any of these reasons, the Penalty APR will apply indefinitely.”  This is in accordance with the Fed’s directive that, “If a card issuer reserves the right to apply the increased rate to any balances indefinitely … the issuer should disclose that the penalty rate may apply indefinitely.”

Citi – Overall:  On Par

  • Clarity on Portion of Balance Affected: ON PAR – Citi provides a brief description of its Penalty APR as well as what could trigger it and is therefore acting in accordance with regulatory guidance.
  • Clarity on APR Changes During First 12 Months: ON PAR – Citi states that you may lose your introductory APR and get the Penalty APR if you make a late payment.  It therefore is “On Par” with regulatory guidelines, as disclosure of more detailed information related to APR increases during the first 12 months is not permitted.  For example, issuers cannot distinguish between being late and being 60 days late.
  • Clarity on How to Get Back to Regular Rate: ON PAR – Citi states that the Penalty APR will apply indefinitely, which is in accordance with regulatory guidance.

Discover – Overall:  On Par

  • Clarity on Portion of Balance Affected: ON PAR – Discover states that the Penalty APR – “From up to 15.99% to up to 24.99% based on your creditworthiness and other factors” – will apply to new transactions and new balance transfers if you miss a payment.  It is therefore acting in accordance with regulatory guidance.
  • Clarity on APR Changes During First 12 Months: ON PAR – Discover does not explicitly mention the circumstances under which it can increase an APR during the first 12 month, instead stating that, “We may end the availability of any intro APR on new transactions and balance transfers and apply the Penalty APR to those transactions if you make a late payment.”  It therefore is “On Par” with regulatory guidelines, as they do not require disclosure of information related to first-year interest rate increases.
  • Clarity on How to Get Back to Regular Rate: ON PAR – Discover states that, “If your APRs for new transactions and balance transfers are increased for a late payment, the Penalty APR will apply indefinitely.”  It is therefore acting in accordance with regulatory guidelines.

Barclaycard US – Overall:  On Par

  • Clarity on Portion of Balance Affected: ON PAR – Barclaycard US states what the Penalty APR is (e.g. “Up to 30.24%, based on your creditworthiness.”) and the fact that a late payment triggers it.  Barclaycard US is therefore acting in accordance with regulatory guidance.
  • Clarity on APR Changes During First 12 Months: ON PAR – Barclaycard US does not explicitly mention the circumstances under which it can increase an APR during the first 12 month, instead stating that, ““We may end your Introductory APR and apply the Penalty APR if you make a late payment.”  It therefore is “On Par” with regulatory guidelines, as they do not require disclosure of information related to first-year interest rate increases.
  • Clarity on How to Get Back to Regular Rate: ON PAR – Barclaycard US says that the Penalty APR may apply indefinitely, which is in accordance with regulatory guidance.

U.S. Bank – Overall:  On Par

  • Clarity on Portion of Balance Affected: ON PAR – Based on the credit card applications we examined, U.S. Bank does not use a Penalty APR.  While U.S. Bank reserves the right to change the terms of its agreements in the future and therefore increase interest rates for new transactions, regulatory guidance does not require a distinction between existing balances and future transactions, which means U.S. Bank is “On Par.”
  • Clarity on APR Changes During First 12 Months: ON PAR – While U.S. Bank does not use a Penalty APR, it does not explicitly state that it cannot change one’s APR terms at all during the first 12 months.  However, U.S. Bank is not required to do so by regulators and is therefore “On Par.”
  • Clarity on How to Get Back to Regular Rate: ON PAR – While U.S. Bank does not use a Penalty APR, it does not explicitly state that any change to the APR terms for new transactions may remain in effect indefinitely.  However, U.S. Bank is not required to do so by regulators and is therefore “On Par.”

USAA – Overall:  On Par

  • Clarity on Portion of Balance Affected: ON PAR – Based on the credit card applications we examined, USAA clearly states that it does not use a Penalty APR.  While USAA reserves the right to change the terms of its agreements in the future and therefore increase interest rates for new transactions, regulatory guidance does not require a distinction between existing balances and future transactions, which means USAA is “On Par.”
  • Clarity on APR Changes During First 12 Months: ON PAR – While USAA does not use a Penalty APR, it does not explicitly state that it cannot change one’s APR terms at all during the first 12 months.  However, USAA is not required to do so by regulators and is therefore “On Par.”
  • Clarity on How to Get Back to Regular Rate: ON PAR – While USAA does not use a Penalty APR, USAA does not explicitly state that any change to the APR terms for new transactions may remain in effect indefinitely.  However, USAA is not required to do so by regulators and is therefore “On Par.”

Wells Fargo – Overall:  On Par

  • Clarity on Portion of Balance Affected: ON PAR – Based on the credit card applications we examined, Wells Fargo does not use a Penalty APR.  While Wells Fargo reserves the right to change the terms of its agreements in the future and therefore increase interest rates for new transactions, regulatory guidance does not require a distinction between existing balances and future transactions, which means Wells Fargo is “On Par.”
  • Clarity on APR Changes During First 12 Months: ON PAR – While Wells Fargo does not use a Penalty APR, it does not explicitly state that it cannot change one’s APR terms at all during the first 12 months.  However, Wells Fargo is not required to do so by regulators and is therefore “On Par.”
  • Clarity on How to Get Back to Regular Rate: ON PAR – While Wells Fargo does not use a Penalty APR, it does not explicitly state that any change to the APR terms for new transactions may remain in effect indefinitely.  However, Wells Fargo is not required to do so by regulators and is therefore “On Par.”

Wells Fargo requested that the following comment be included in this study:

“We applaud organizations who try to help consumers understand how to responsibly choose and use credit cards – including actions that can result in a change of pricing terms.  Wells Fargo does not engage in penalty APR pricing and we don’t change introductory rates in response to late payments by the customer. We design our disclosures to clearly inform consumers of actions we may take.”

DETAILED RESULTS BY REGULATORY AGENCY:

Federal Reserve [based on sample disclosure box and § 1026.60(b)(1)(5)] – Total Score:  7.5%

  • Clarity on Portion of Balance Affected: POOR – The sample disclosure box leaves out the fact that the triggers listed in the “Penalty APR and When it Applies” section can only apply to new transactions. Additionally, it does not clarify that the credit card company can only apply the Penalty APR to your entire balance if you are 60 days delinquent.  While this is consistent with the Fed’s final rulemaking, which holds that, “An issuer may not distinguish between the events that may result in an increased rate for existing balances and the events that may result in an increased rate for new transactions,” it will undoubtedly create confusion in the minds of consumers.  As a result, regulators should amend both their sample disclosure box and final rulemaking guidelines to require that issuers distinguish what triggers a Penalty APR being applied to new transactions, versus one’s entire balance.
  • Clarity on APR Changes During First 12 Months: FAIR – The Federal Reserve’s sample disclosure mentions that you cannot lose your introductory rate unless you are 60 days delinquent.  However, this is somewhat incomplete and therefore misleading because the way it is written implies that this rule only applies to the introductory rate when in fact it applies to all interest rates during the first 12 months, regardless of the length and presence of introductory rates.  What’s more, this piece of information is listed outside the box and after the section of the sample disclosure that deals with fees, which means consumers looking for interest rate information could easily miss it.  As a result, regulators should amend their policies related to introductory interest rate policies.
  • Clarity on How to Get Back to Regular Rate: POOR – While the Federal Reserve’s sample disclosure clearly states that the Penalty APR will apply until you make 6 consecutive minimum payments when due, that’s both incomplete and somewhat incorrect.  First of all, issuers are required to revert back to your regular rate only for existing balances when you make six consecutive payments, and they must be the next six payments after the rate increase, not just on-time payments made during any six month period.  A Penalty APR can apply to new transactions indefinitely, and that is not reflected in the Federal Reserve’s model disclosure box.  What’s more, the Federal Reserve’s final rulemaking clearly states that, “The card issuer may not disclose in the table any limitations imposed by §§ 1026.55(b)(4) and 1026.59 on the duration of increased rates,” which in layman’s terms means that they cannot disclose when issuers are legally required to reverse a Penalty APR.  The purpose of this is to limit the inclusion of information in disclosures that impacts all issuers equally.  However, communicating that Penalty APRs can apply indefinitely may lead to more confusion than explaining in simple terms how things truly work.

Consumer Financial Protection Bureau [based on agency prototype] – Total Score:  85%

  • Clarity on Portion of Balance Affected: GOOD – The Consumer Financial Protection Bureau’s (CFPB) prototype credit card disclosure does a good job differentiating between the interest rate repricing triggers that can affect only new transactions and those that affect existing balances as well.  The CFPB therefore received 70/70 in this category.
  • Clarity on APR Changes During First 12 Months:  GOOD – The CFPB’s prototype disclosure makes it clear what interest rate increases can occur during the first year as well as what increases can occur thereafter.  The CFPB therefore received 15/15 in this category.
  • Clarity on How to Get Back to Regular Rate:  POOR – The CFPB’s prototype disclosure contains no mention of how to get back your regular rate if an interest rate increase is applied.  It therefore received 0/15 in this category.

 

DISCLOSURES

Federal Reserve Model Disclosure (Currently in Use)

 

Interest Rates and Interest Charges

Penalty APR and When it Applies

28.99%

This APR may be applied to your account if you:1) Make a late payment;
2) Go over your credit limit;
3) Make a payment that is returned; or
4) Do any of the above on another account that you have with us.How Long Will the Penalty APR Apply?: If your APRs are increased for any of these reasons, the Penalty APR will apply until you make six consecutive minimum payments when due.

Loss of Introductory APR:

We may end your introductory APR and apply the Penalty APR if you become more than 60 days late in paying your bill.

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Consumer Financial Protection Bureau (CFPB) Prototype

 

2. Changes
We can change some of your rates and other terms in accordance with the law. This table shows some of the possible changes. Written notice will explain how changes apply. You cannot change the terms of this agreement.
Type of Change What may trigger change Advance Notice
Penalty interest rate applies to new charges [penalty rate information] 45 days
Other interest rate increase on new charges In the first year, a promotional rate ends or the prime rate changes. After that, any reason Promotional rate ends or prime rate changes, no notice. Otherwise, 45 days
Penalty interest rate applies to existing balances If you are 60 days past due 45 days
Other interest rate increase on existing balances Promotional period ends, prime rate changes, or a workout arrangement No notice required or per terms of workout arrangement
Increase or decrease to credit limits Any reason None
Some fees and other terms Can change for any reason Up to 45 days for certain fee and minimum payment changes

 

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