Banks are reducing some cardholders’ interest rates, thanks to a section of the credit card reform law that requires them to review any rate increases imposed since January 2009. Millions of consumers faced rate hikes that year, as the economy tanked, banks teetered and credit card reforms loomed.
Federal Reserve data shows the average interest rate assessed rose to 14.31 percent in 2009, from 13.57 percent in 2008.
“Most consumers believe that it was the new credit card law that caused the higher rates, but it was completely because of the economy,” said Odysseas Papadimitriou, CEO of CardHub.com. He estimates between 91 and 121 million cards got hit with a rate hike during the recession.
It’s not clear how many of those cardholders will benefit from the review-driven rate cuts. Many who saw hikes because of problem payment histories, Papadimitriou noted, did not improve their habits and won’t be eligible.
In addition, the number of consumers holding credit cards fell, by at least 8 million in 2010 alone, according to credit reporting agency TransUnion.
Nevertheless, millions will benefit.
Bank of America Corp., the nation’s second largest card issuer by dollars spent, said it will reduce the rate on about 1 million of its cards.
Neither the largest U.S. issuer, JPMorgan Chase & Co., with more than 89 million cards, nor the next four in line, Citigroup Inc., Capital One Financial Corp., Discover Financial Services and American Express Co., would reveal the specific number of cards that would receive a rate cut. All confirmed some customers will see lower rates.
The 1 million cards that Bank of America is acting on represents about 2 percent of its existing accounts, said Ben Woolsey, director of marketing and consumer research at Creditcards.com. If that ratio holds true at banks across the country, more than 10.5 million cards from MasterCard, Visa, American Express and Discover will see rate reductions.
Citi is also reviewing its partner cards, those issued through stores like Sears, so the total number of cuts will most likely be higher.
The law doesn’t explicitly require banks to lower rates. It states that if a card’s interest rate was increased based on factors such as credit risk or market conditions, those same issues should be considered in reviews every six months. And the rates should be cut “when a reduction is indicated.”
“That allows a lot of leeway,” said Bill Hardekopf, CEO of Lowcards.com. The law doesn’t say rates have to be lowered, and it doesn’t say that rates have to be restored to what they were before.
One factor banks will consider before lowering anyone’s rate is that they cannot raise the rate again on an existing balance, said Ken Clayton, general counsel for card policy at the American Bankers Association. The credit card reform law requires banks to warn customers about rate hikes 45 days in advance and limits such increases to new purchases. Consumers may also decline the hike, shut the account and pay down the balance at the lower rate.
Still, for cardholders carrying a balance, even a small decrease can mean big savings, especially for those who are only making minimum payments.
For instance, the average balance on a bank-issued card at the end of 2010 was $4,965, according to TransUnion, a credit reporting agency.
At a 19 percent interest rate, a typical card with that balance would take 13 years, 9 months to pay off using minimum payments. The interest would total $3,894. A rate cut to 16 percent would reduce the payoff time to 12 years, 5 months, and drop the interest down to $2,906.
This type of detail is now required on credit card statements, so cardholders may see the impact of a rate reduction by comparing new statements with prior ones.
Hardekopf noted that competition is heating up again for credit card customers, and lowering rates gives banks an opportunity to boost their images and potentially attract new business.
Another factor consumers should remember is that if banks cut interest rates, they’re likely to try to make up the lost revenue by creating or increasing fees elsewhere, like the recently announced $5 ATM fees being tested by Chase.
“It’s kind of like Whack-a-mole,” said Adam Levin of Credit.com. “It goes down in one spot and comes back up in another.”