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Credit Woes Not Tied to Credit CARD Act

ARLINGTON, Va. ( TheStreet) -- It's no secret the CARD Act, which hit a one-year anniversary Feb. 22, increased transparency throughout the credit card industry. The law fostered better communication between issuers and their customers and lowered the disparity that often existed between advertised terms and those consumers were actually held accountable for in using their cards.

There is little debate about the benefit of this CARD Act side effect; greater transparency helps everyone. Consumers now have a clearer sense of where $12.1 billion in previously hidden fees originate from and are more conscious of what they must do to effectively manage their credit card accounts. Honest credit card companies no longer face such stiff competition from unscrupulous issuers who, before the law's passage, lured consumers with attractive terms only to surprise them with subsequent fee and interest rate increases. As Capital One ( COF) Chief Executive Richard Fairbank said during the company's fourth-quarter earnings call last year, the act created a level playing field for lenders.

The interest rate on your credit card may have risen in the past year, but that's not due to the CARD Act, studies show.

Still, debate persists over its impact on interest rates and credit availability. Many people ascribe the rising cost of interest and the decline in direct-mail credit card offers from companies such as Chase (JPM), Citi (C) and Discover (DFS) over the past year to the CARD Act. According to a Center for Responsible Spending report and interest rate study by Card, though, economic pressures are the true causes of these trends.

The CardHub study came to this conclusion after intuitively evaluating the CARD Act and statistically analyzing interest rates, recent and historical. It discovered that not only does it make no sense for credit card companies to increase interest rates in reaction to the law, but that the observed rise in interest costs is actually consistent with historical trends. More specifically, since the CARD Act restricts the penalty fees issuers such as HSBC (HBC) charge on subprime credit cards and not their ability to freely set interest rates, it's doubtful issuers will use interest rate increases to make up for lost revenue, because doing so would disproportionately affect prime and superprime consumers with high balances who, in reaction to increased costs, would take their business to companies such as American Express (AXP) and Iberia Bank (IBKC) that have been relatively unaffected by penalty fee limits.

In addition, the interest rate increases seen over the past year are neither as significant as those seen during previous recessions nor as pronounced as statistical models indicate they should be based on current unemployment levels, credit card charge-off rates and credit card delinquency figures. The numbers all point to the conclusion that the CARD Act is not to blame for the nation's credit woes.

The Center for Responsible Lending came to similar conclusions after conducting its own statistical analysis. "Once the economic downturn is taken into account, the actual rate consumers have paid on credit card debt has remained level," the organization says. "Direct-mail offers have been extended at a volume and pace consistent with economic conditions."

The CARD Act should get an all-around good grade after one year. Its benefits have been universally acknowledged and its shortcomings proven non-existent.

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