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Consumers have been up in arms over escalating rates on their credit cards. They've complained to lenders, researched options on other credit card terms, and sent a loud and clear message to their Congressional representatives.
President Obama signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 last May, and, in response to the promise of tighter restrictions, credit card companies scrambled to boost revenues by establishing rate increases prior to the February 2010 date for enacting the legislation. The new law will ban so-called arbitrary rate increases on interest, establishing guidelines for regulating "usury", and enforcing statutes that determine when an arbitrary rate exceeds the law.
The lender's immediate increases sparked further responses on the Hill and many legislators are now considering a 16 percent maximum rate for credit cards along with a $15 cap on late payment fees. Consumers beware: credit card companies may find another tactic to respond to new laws and protect their profits.
A Balancing Act: Regulating Credit Card Usury
Credit card companies view any cap tactics as restraint of trade. And while a credit card rate cap looks good to consumers at the outset, the inevitable response by banks and lenders may be more unpleasant that people imagine:
Since credit card companies more easily extend the best credit terms to consumers with excellent credit scores, you can expect fewer loans made to credit card holders with poor--or even average--credit. That means fewer risks for credit card companies even as their rates are capped. And the net result is that average borrowers and those with risky credit may have to look elsewhere to borrow.
Even consumers with good or excellent credit histories may pay the price for the caps, since the companies must shift terms to those who can shoulder the losses created by interest capping. That means, without high rates currently levied on average or risk borrowers, credit companies could raise the rates on borrowers who presently enjoy seven-to-ten percent rates. Bye-bye.
You can also expect your fees to go up as credit card companies could use higher fees to offset a loss in earnings through the Credit CARD Act. The party may be over.
History Repeats Itself with Increased Fees
Down under in Australia six years ago, the central bank forced credit card companies to slice interchange fees in half, resulting in a less-than 1 percent charge. Retailers had argued for years that the fees they paid banks for merchant account transactions was unfair.
Consequently, Australian banks fought back by cutting perks, rewards programs, and slashed grace periods between a date of sale and the initiation of interest. For those who kept rewards programs, the companies hiked annual fees. Profit-taking seeks its own level. The average annual fee for an Australian Gold Card, The New York Times reports, is $140 Australian per year, increased from the $98 Australian rates charged before the new laws took effect.
Is There a Better Way Toward Reform?
Certainly regulations to curb and penalize unfair lending practices are a great beginning. But someone is going to have to pay for the caps imposed by the credit CARD Act, and it looks like it's going to be consumers--who are already cash-strapped--and merchants, who are likely to pass the increased costs on to consumers.
The root cause goes untreated as we continue to believe in a culture of borrowing and spending. Irresponsible parents teach their children the power of plastic without educating them about consequences. Annual interest rates on outrageous payday loans, borrowing against anticipated tax returns, and pawn loans can exceed 400 percent. Capping is a small measure that can backfire while our deepest credit problems go unchecked.