FOCUS: CREDIT CARDS
Credit card law could hurt most reliable customers
Ban on abuses raises fear of higher fees
The credit card reform bill that President Obama is expected to sign Friday is designed to rein in abusive credit card practices, but it has prompted gloomy predictions about the impact on even the best customers.
The House voted, 361-64, Wednesday to adopt the version approved a day earlier by the Senate, sending the measure to the president.
The bill, hailed by consumer advocates for tackling the powerful credit card industry, sets limits on sudden interest rate increases, capricious fees and abusive terms in fine print. But some unintended consequences could include higher annual fees and fewer bonus reward programs.
Some fear an end to the interest-free 30-day grace period for those who pay off their balances each month.
George Scherer is exactly the type of customer banks say could be hurt by the Credit Card Accountability Responsibility and Disclosure Act of 2009. He has not missed a payment since opening his first credit account in 1969. Every month, he pays the balances on his two credit cards in full.
Credit card companies said the bill will force them to recoup lost profits from model customers like Scherer.
They say limits on fees and interest charges will mean the end of bonus rewards programs and low interest rates, as well as the return of annual fees for customers in good standing.
Scherer said he fears card companies could start charging interest from the day of a purchase, rather than after the traditional 30-day grace period.
“If they start charging interest from the day of purchase, I’ll just pay cash for everything,” he said. “It’s no big deal to me at all.”
In fact, experts said, that would be the response from many consumers, making the elimination of all incentives and the grace period doubtful.
“Companies would lose a lot of business,” said Scott Laughlin, client service manager at Consumer Credit Counseling of Buffalo. “These good customers are the ones with the bargaining power. Nothing is keeping them with a credit card company that has nothing to offer them.”
Cristian Tiu, assistant professor of finance and managerial economics at the University at Buffalo School of Management, agreed that clamping down completely would be difficult. While interest rates might increase at first and bonuses such as frequent flier miles could disappear, they probably would kick back in eventually, he said.
“Somebody has to drop first because of competition. Somebody will want to snatch that customer and will offer incentives to do it,” Tiu said. “I wouldn’t be too worried that those benefits would go away forever.”
In addition, credit card companies collect merchant fees on each purchase. That revenue would disappear if consumers switch back to cash, giving credit companies another reason not to penalize good customers.
Some of the changes the law would force, including a requirement that cardholders receive 45 days’ notice of any rate increase, already are on track to take effect in July 2010 under new regulations by the Federal Reserve. The legislation would put these changes into law and go further in restricting when and how banks charge people and who could get a card.
Under the bill, a customer would have to be more than 60 days behind on a payment before the interest rate on an existing balance could be increased. Even then, the lender would be required to restore the previous, lower rate if the cardholder pays the minimum balance on time for six months.
But Edward Yingling, president and chief executive officer of the American Bankers Association, which opposed the legislation, said the new rules will limit the card companies’ ability to price according to risk.
“Less credit will be available generally, which means some consumers and small businesses will not be able to obtain credit cards at all, particularly younger people and start-up small businesses,” Yingling said.
Another provision keeps companies from issuing credit cards to consumers under 21 years old unless they can verify their income and ability to pay. If young cardholders want to increase their credit limits, they would need parental approval.
Allison Morgan, an 18-year-old from Barker, activated her first credit card Tuesday after being solicited by the bank at which she has a savings account. Under the new bill, people like her won’t be able to get cards so easily. But with her peers in mind, Morgan said more restrictions might not be a bad idea.
“I definitely think there are people out there who need a law to protect them from themselves,” Morgan said. “I have friends who buy way too many material things they don’t have money for, just to have them.”
Consumer advocates strongly back the bill, saying the credit card companies have trampled consumers long enough and require government intervention to keep them in check.
Last year, the Nilson Report estimated more than 700 million credit cards were in circulation in the United States — more than two cards for every man, woman and child.
Many cardholders carry hefty balances. According to the Federal Reserve, Americans are more than $2.5 trillion in debt, excluding home mortgages.
Lawmakers supporting the bill say legislation is necessary to stop a vicious cycle: A cardholder falls behind on one bill and watches helplessly as the rate spikes on the existing balance. Buried in interest fees and other charges, they spend less, which hurts local businesses.
But pointed fingers and debates aside, experts said the most important effects of this bill remain to be seen.
“The question is whether this will be beneficial for our struggling economy or whether it will not,” Tiu said. “And nobody is sure.”
The Associated Press contributed to this report.
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