Credit Card Companies Raise Interest Rates and Introduce New Fees Ahead of Regulation
A Shift in the Industry
Millions of consumers using credit cards from major banks have been hit with higher interest rates and new fees in the past year. This move comes in response to an impending regulation that aimed to reduce late fees, but is now unlikely to take effect. Synchrony and Bread Financial, which specialize in issuing branded cards for companies like Verizon and JCPenney, have been the most vocal about the changes.
The Impact on Consumers
The proposed regulation, introduced by the Consumer Financial Protection Bureau (CFPB), aimed to save consumers money by capping late fees at $8 per incident. However, the industry has responded by raising interest rates and introducing new fees, resulting in higher costs for consumers. The average annual percentage rate (APR) increase is around 3-5 percentage points, with some cards reaching as high as 35.99%. Additionally, customers are being charged new monthly fees of between $1.99 and $2.99 for receiving paper statements.
The Reason Behind the Changes
Bread Financial, which issues cards for retailers like Big Lots and Victoria’s Secret, began increasing rates on some of its cards in late 2023 in anticipation of the CFPB rule. The company’s CFO, Perry Beberman, stated that they’ve implemented changes, including APR increases and paper statement fees, to offset the potential loss.
The Industry’s Argument
Banks and their trade groups argue that late fees are necessary to deter default and that capping them at $8 per incident would shift costs to those who pay their bills on time. The U.S. Chamber of Commerce has sued the CFPB, arguing that the agency exceeded its authority.
The Current Situation
While the rule is currently held up in courts, card users are already dealing with the higher borrowing costs and fees. The higher APRs apply to new loans, not old debts, meaning the impact to consumers will rise in coming months as they accumulate fresh debts to fund holiday spending. Americans owe a record $1.17 trillion on their cards, 8.1% higher than a year ago.
The Effect on Consumers with Lower Credit Scores
The surge in borrowing costs will have a bigger impact on consumers with lower credit scores who are more likely to have store cards issued by Synchrony and Bread. These customers may be considered too risky to qualify for popular rewards cards from issuers like JPMorgan Chase and American Express, and are therefore more likely to turn to co-branded cards as alternatives.
Other Banks Follow Suit
Other banks, including Barclays and Citigroup, have also raised rates on their cards. Cards from Banana Republic and Athleta issued by Barclays each saw an APR jump of 5 percentage points in the past year. The Home Depot card from Citigroup had a rise of 3 percentage points, while the bank raised the APR on its Meijer card by 4 percentage points.
The Future of the CFPB Rule
The fate of the CFPB rule is considered murky, with many expecting it to be reversed under the new administration. Even if the rule is eventually implemented, it’s unclear whether banks will reverse the higher APRs and fees. Synchrony managers have been noncommittal on the issue, stating that they need to proceed as though the rule is happening.
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