Balance Transfer Fees, High Interest Rates: Don’t Fault the CARD Act

by John Kiernan on February 25, 2011

New Credit CardsTwo common complaints about the new credit card law, which celebrated its one-year anniversary on Feb. 22, 2011, are that it led to the extinction of 0% balance transfer credit cards with no fee and that it caused increased interest rates. One of these complaints is rooted in fact, but neither serves as a valid criticism of the law.

Yes, the CARD Act’s passage effectively signaled the beginning of the end for credit cards that offered 0% APR on balance transfers and had no fee for the service. However, no one really has the right to complain about this.

Credit card companies were able to offer such an attractive combination of features because the money they lost on people who took full advantage of these free balance transfers was more than made up for by the revenue gained from those who didn’t. Prior to the CARD Act, credit card companies were looking for whatever excuse they could find take away consumers’ 0% rates. For instance, it would not be uncommon for someone to lose their 0% rate as a result of being one day late on a payment or charging $5 over their credit limits.

Now, however, increased interest rates cannot be applied to existing balances unless a consumer is at least 60 days delinquent, making it much more difficult for credit card companies to continue these hair-trigger re-pricing practices.

It’s simply not financially viable for credit card companies to offer free balances transfers unless there’s another side to the coin. Once the ability to easily make money on suddenly high interest rates was taken away, so too were most free balance transfer offers. In fact, the Discover More – No Balance Transfer Fee is the only one that exists today.

However, people shouldn’t be mad because the system under which some consumers enjoyed a free ride subsidized by the misfortune of others truly wasn’t fair. No one welcomes higher costs, but if you’re one of the people who benefitted from free balance transfers, as I am, just think about why you were able to do so and realize that things are now for the better. Everyone now pays for their own use.

While this change in the financial landscape can be attributed to the CARD Act, high interest rates cannot be. It’s true that interest rates have risen since the CARD Act was implemented, but a CardHub.com Interest Rate Study proves that this increase occurred as a result of economic pressures typical of a recession, not because of any law.

By examining historical financial data as well as using statistical modeling to evaluate current economic conditions, Card Hub was able to determine that not only are current interest rates lower than those in previous recessions, but also that recent rate increases have actually not been as significant as would be expected given the high credit card charge-off rates and widespread unemployment during the past year.

Therefore, while the CARD Act has its faults, high interest rates and balance transfer fees are not among them. All in all, the CARD Act at one-year-old has proven itself to be a success.

[Disclosure: Some of the links within this article point to CardHub.com, which is owned by the same parent company as Wallet Blog.]

Discussion

Odysseas Papadimitriou
@ Hank - A few things to consider:
1) There is most likely a balance transfer fee of around 3%
2) Make sure you make no purchases while you have the transferred balance because you will not have a grace period
3) They are hoping you will have a balance after the 12 months of 0% is over.
4) COMPARE the CapOne offer with the best balance transfer credit cards in the market. There are transfer credit cards with 0% for 21 months:
http://www.cardhub.com/best-balance-transfer-credit-cards/
October 27 at 21:37 pm
Hank
Capital One is offering me 0% APR to transfer a balance from another card. From whatever I pay each month, the min required payment amt will go toward the transferred bal (with 0% interest), and the rest will go toward whatever other charges were incurred during the billing period. This sounds too good to be true. If my account is in good standing with no late fees, past due fees, etc., then the only way Cap1 can make $ is if I fail to pay off the 0% int balance in 12 months. What am I missing?
October 25 at 15:19 pm

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