Interest Hikes Seen as New Law Takes Effect

With less than a month to go before the Credit CARD Act of 2009 fully takes effect, noticeable hikes in interest rates are beginning to take place. According to industry insiders, new credit card offers had risen to more than 12% on the average since the start of the New Year.

Professor Morris Davis of the Wisconsin School of Business stated that this is part of a much larger change in strategy currently being applied by credit card companies in order to keep profitability. He stated that since the new law would limit a bank’s ability to adjust credit card terms, lenders look for other ways to generate revenue.

The rise in interest rates is said to be the highest in the last three years. Davis added that since the government is taking away an avenue for rate return, card issuers are likely to search for other means to maximize earnings.

Among the adjustments seen in the industry are hikes in reward cards. Reward cards are incentives or inducements offered to consumers for them to make multiple purchases. For the past six months, said category had increased by more than one percent.

Bank of America increased the annual percentage rate (APR) on its reward cards recently and this move was followed by another credit card giant, Discover. Small alterations on the terms and conditions of cards are also taking place. As of date, a much shorter introductory balance transfer APR periods had also taken effect.

Analysts explained that card holders and consumers are being adversely affected by these adjustments. If a borrower had to pay $5,000 on a credit card at $150 per month, by using today’s average interest rate, he/she would have to cough out $141 more. The credit would now amount to $6,259. Such is not the case half a year earlier. It was also revealed that having a credit card after next month would be harder to maintain. Davis, on the other hand, implied that modifications into how the system works would mean that banks would have to adapt.

As the law provides, some changes seen adverse to banks and issuers after February 22 are the following: Limitations on interest hikes in the first week after a credit card has been issued; and, that no application of rate hikes would be allowed to current card balances retroactively, meaning it would not affect previous debts, except under limited circumstances.

In the end, Davis contends that the burden is usually shifted to the card holders. By making it harder for credit card companies to do business, consumers are the ones who end up with having to pay for higher rates.