May 21, 2009
Credit card reform


Landmark credit card legislation, poised to reach President Obama's desk as early as Memorial Day, will force the card industry to reinvent itself and consumers to rethink the way they use plastic.

The Senate Tuesday took a critical step forward by voting 90 to 5 to pass a bill that would sharply curtail credit card issuers' ability to raise interest rates and charge fees. Lawmakers will now turn to reconciling differences with a similar bill approved by the House last month. Swift passage was expected given that the Senate version received so much bipartisan support and that the White House has pressed for action.

When Obama signs a bill into law as expected, the $960 billion credit card industry will go through restructuring that could have broad implications for consumers. (Details of the bill can be found here.)

The bill will prohibit card companies from raising interest rates on existing balances unless the borrower is at least 60 days late. If the cardholder pays on time for the following six months, the company would have to restore the original rate. On cards with more than one interest rate, issuers will have to apply payments first to the debts with the highest rates, which would help borrowers pay off their cards more quickly.

Treasury Secretary Timothy Geithner said the bill "will help create a more fair, transparent and simple consumer credit market."

The credit card industry is a great example of the consequences of deregulation gone wild. The profits they were raking in above a certain point had little to do with creating wealth and everything to do with transferring it from lower-income consumers to their own bottom lines. This is long overdue, and frankly it should have gone farther. But this is a good start.

When credit cards were introduced about 50 years ago, issuers practiced a one-size-fits-all approach of charging an annual fee and roughly the same interest rate of about 18 percent to everyone. As the industry became more deregulated in the 1980s, around the time that credit scores were introduced, issuers were able to separate the risky from the not-so-risky borrower and tailor the terms of card contracts.

The money they made from customers who did not pay their bills in full each month became an important revenue source. The industry makes $15 billion annually from penalty fees, and one-fifth of consumers carrying credit card debt pay an interest rate above 20 percent, according to figures cited by the White House and compiled from the Government Accountability Office and the Federal Reserve.

To make up for the lost revenue, card issuers will turn to those customers who pay what they owe in full and on time every month, analysts said. Gone will be the days when creditworthy customers enjoyed the benefits of low interest rates and cards that offer rewards such as frequent flier miles and cash back, they said. Annual fees, which had been banished to cards with rewards programs, are likely to return. Offers for zero percent balance transfers are likely to become rarer.

"This industry will start looking more like a one-size-fits-all pricing approach which dominated in the '80s -- 18 percent interest and a $20 annual fees," said David Robertson, publisher of the Nilson Report, which covers the industry. Customers who pay in full each month will have "to start picking up the slack, to start pulling their weight."

You mean they'll change business models to be more like American Express? What a terrible thing that would be, and I say that as one of those so-called "deadbeats" who pays in full every month. Like Kevin Drum, I don't buy any of the industry's sobbing, and if I did I'd have no sympathy for them anyway. I mean, come on, if people like me were so bad for their business, why did they never cut me off or change the terms of my credit? So, you know, cry me a river already. Maybe this will force them to innovate in ways that are actually beneficial to the customer.

Posted by Charles Kuffner on May 21, 2009 to Bidness
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