Credit Card Reform Likely to Have Unintended Negative Consequences
By Curtis Arnold, CardRatings.com Founder
If you carry a credit card, you should circle February 22, 2010 on your calendar. That's the day when key provisions of the new credit card legislation take effect.
The state of the economy has already taken its toll on Americans' credit scores. By the first quarter of 2009, TransUnion, a major credit bureau, estimated that average credit scores among the consumers it tracks had fallen by six points from three quarters earlier. Many Americans have found themselves in a tough predicament: unable to qualify for the same no-interest credit card offers that used to clutter our mailboxes, yet facing higher costs to carry consumer debt. There has never been a worse time to carry credit card debt in the 50 year or so history of the card industry.
Now that it's going to be tougher for banks to make a profit on their credit card products (analysts expect the legislation to cost the industry billions of dollars in lost fee and interest income), I think we can expect three major changes from the industry in the months leading up to the new law's implementation:
1. Average rates are likely to rise.
Banks have already started to use interest rate hikes as a tool to recapitalize their operations. If you've seen your interest rate jump from 10% to 15%, you're likely to try to transfer that balance to a low rate credit card. The lender you just paid may then reduce their risk by cutting your credit line. Expect this vicious cycle to repeat even more often going forward, especially since the laws will remove banks' future ability to spike interest rates on existing card balances unless your account is 60 days past due.
2. Get ready for the return of annual fees.
The new law curtails many of the credit card industry's tried and true revenue sources. It will be harder to keep interest rates high, yet consumers will still demand plenty of perks. Therefore, I anticipate some card issuers will add annual fees to some credit card product lines that were previously fee-free, particularly reward cards.
For example, you can expect to pay a little extra for reward programs involving gift cards or frequent flyer miles. Barclays Bank Delaware is even brashly marketing a new premium rewards card called Visa Black that comes with a $495 annual price tag! While I don't think most of us will be paying 500 bucks for the privilege of carrying a card, a $20 fee on a card that has never had a fee is certainly a realistic possibility.
3. Grace periods are likely to shrink.
If you pay off your balance in full each month, most credit cards currently offer grace periods of 20-25 days before interest begins to accrue on purchases. Just as airlines have scraped the barrel of potential service fees to find revenue, some credit card companies are likely to reduce grace periods. While the new law addresses how timely that card companies must mail your bill, it certainly doesn't protect your grace period. It's also possible that we'll see a new class of card emerge that ties a more generous grace period with a higher annual fee -- potential targets include frequent traveler credit card and business card users.
While all three of these side effects might want to make you scream at a hapless credit card customer service representative, I've been urging my readers to look at the silver lining. For years, Americans have complained about the shady tactics used by card issuers. While the new legislation will likely have many unintended negative consequences, I think it will help rebuild consumer trust in the industry. I've always maintained that this industry can be consumer friendly and profitable at the same time. Novel thought I know, but I think it just might work...at least for a few innovative issuers. :)
Do you feel these credit card regulations will positively or negatively affect consumers? Tell how you feel about it in our credit card forum.
This article was written by Curtis Arnold, a nationally recognized consumer educator and advocate. Curtis has been educating consumers about credit cards since 1998. He is regularly interviewed and quoted by respected members of the national press regarding consumer credit issues. His new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line is available now! Order online and receive up to a 32% discount.
CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.
Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thank you for your interest!
If you carry a credit card, you should circle February 22, 2010 on your calendar. That's the day when key provisions of the new credit card legislation take effect.
The state of the economy has already taken its toll on Americans' credit scores. By the first quarter of 2009, TransUnion, a major credit bureau, estimated that average credit scores among the consumers it tracks had fallen by six points from three quarters earlier. Many Americans have found themselves in a tough predicament: unable to qualify for the same no-interest credit card offers that used to clutter our mailboxes, yet facing higher costs to carry consumer debt. There has never been a worse time to carry credit card debt in the 50 year or so history of the card industry.
Now that it's going to be tougher for banks to make a profit on their credit card products (analysts expect the legislation to cost the industry billions of dollars in lost fee and interest income), I think we can expect three major changes from the industry in the months leading up to the new law's implementation:
1. Average rates are likely to rise.
Banks have already started to use interest rate hikes as a tool to recapitalize their operations. If you've seen your interest rate jump from 10% to 15%, you're likely to try to transfer that balance to a low rate credit card. The lender you just paid may then reduce their risk by cutting your credit line. Expect this vicious cycle to repeat even more often going forward, especially since the laws will remove banks' future ability to spike interest rates on existing card balances unless your account is 60 days past due.
2. Get ready for the return of annual fees.
The new law curtails many of the credit card industry's tried and true revenue sources. It will be harder to keep interest rates high, yet consumers will still demand plenty of perks. Therefore, I anticipate some card issuers will add annual fees to some credit card product lines that were previously fee-free, particularly reward cards.
For example, you can expect to pay a little extra for reward programs involving gift cards or frequent flyer miles. Barclays Bank Delaware is even brashly marketing a new premium rewards card called Visa Black that comes with a $495 annual price tag! While I don't think most of us will be paying 500 bucks for the privilege of carrying a card, a $20 fee on a card that has never had a fee is certainly a realistic possibility.
3. Grace periods are likely to shrink.
If you pay off your balance in full each month, most credit cards currently offer grace periods of 20-25 days before interest begins to accrue on purchases. Just as airlines have scraped the barrel of potential service fees to find revenue, some credit card companies are likely to reduce grace periods. While the new law addresses how timely that card companies must mail your bill, it certainly doesn't protect your grace period. It's also possible that we'll see a new class of card emerge that ties a more generous grace period with a higher annual fee -- potential targets include frequent traveler credit card and business card users.
While all three of these side effects might want to make you scream at a hapless credit card customer service representative, I've been urging my readers to look at the silver lining. For years, Americans have complained about the shady tactics used by card issuers. While the new legislation will likely have many unintended negative consequences, I think it will help rebuild consumer trust in the industry. I've always maintained that this industry can be consumer friendly and profitable at the same time. Novel thought I know, but I think it just might work...at least for a few innovative issuers. :)
Do you feel these credit card regulations will positively or negatively affect consumers? Tell how you feel about it in our credit card forum.
This article was written by Curtis Arnold, a nationally recognized consumer educator and advocate. Curtis has been educating consumers about credit cards since 1998. He is regularly interviewed and quoted by respected members of the national press regarding consumer credit issues. His new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line is available now! Order online and receive up to a 32% discount.
CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.
Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thank you for your interest!
Labels: credit card reform february 2010, new credit legislation
posted by CardRatings.com at 12:24 PM
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