President Obama has signed sweeping credit card reforms into law. The reforms are designed to protect cardholders from certain interest rate hikes, unfair fees, issuing, and billing practices, and generally require greater transparency and accountability from card issuers. While most consumer rights groups applaud the reforms as long overdue restrictions on deceptive and predatory practices, some serious points of concern were raised this week in the econo-blogosphere.
First, Odysseas Papadimitriou provides a helpful overview of the bill's main features and how they'll likely impact your wallet, and concludes: "The credit card legislation will significantly change the way credit card companies conduct business... consumers will see smaller credit lines, higher interest rates, higher membership fees, and fewer 0 percent offers. Rewards offers will likely stay the same... While the effects of the legislation... may seem wholly negative, we strongly believe that the long-term effects will result in a net benefit for consumers."
But Andrew Martin in the 'New York Times' Monday raised concern among those who pay their credit card balances in full each month and enjoy rewards programs with no annual fees. Martin certainly pleased the American Banker Association by presenting its quasi-threat "to look at reviving annual fees, curtailing cash-back and other rewards programs, and charging interest immediately on a purchase instead of allowing a grace period of weeks."
Francis Cianfrocca falls in line: "The credit card industry will have no choice but to start raising fees on the people who do what your mother always told you to do: pay off your debts on time and avoid high-rate balances."
But Bryan Caplan says the ABA's claims that responsible, low-risk card holders will suffer are just 'wrong, wrong, wrong... [Martin's 'NYT'] article is as crazy as a story about the minimum wage claiming that highly skilled workers suffer the most because employers need to 'make up the difference somewhere.' The correct retort, of course, is 'Yea, they make up the difference by buying less of the labor that now costs more.'"
Tom Petruno also doesn't buy it: "If [
card-issuing banks] really want to aggravate their best customers, they may have to factor in the risk that Congress could come back and hit them even harder. Better to count your bailout money and dim the rhetoric, boys."
Former Dallas Fed president Bob McTeer notes this isn't the first time lawmakers have called bankers' bluff on credit card regulation, and acknowledges that "I will probably be one victim of the legislation," since he pays his balance in full each month to obtain frequent flyer miles. "Many of the credit card issuers brought this on themselves by some of their egregious actions and lack of proper communication with their customers... The economics of the situation and my gut are pulling in opposite directions."
Barbara Kiviat doesn't accept that banks don't profit from cardholders like her who pay the balance in full each month. Reminding us of exchange fees card issuers charge, Kiviat asks, "Why would credit card companies, in the aggregate, do business with the 42 percent of American households that pay off their balance each month?"
Likewise Ryan Avent: "If credit card companies could have been making more money on quality borrowers all along, why didn't they?... What seems more probable is that high-quality borrowers used to have more credit options available to them, and so credit card companies had to work harder to get their business. Now, in the midst of recession with many borrowing options -- including home equity lines -- no longer available, credit card lenders can squeeze more out their customers. They're the only game in town and can price accordingly."
Felix Salmon concurs with Kiviat and Avent that high-quality borrowers were always profitable for card issuers, and adds: "The cost to society of having millions of individuals carrying large credit card balances with very high interest rates is vastly greater than the benefit to [no-balance cardholders] of having a reasonably convenient way of paying for goods in shops."
Ezra Klein adds a worthwhile point: "There's a good reason for credit card companies to want lots of users who aren't very profitable. Imagine a world in which 42 percent of households pay their bills and 58 percent miss the occasional payment. Now imagine that the credit card companies lose a bit of money on the 42 percent and make a lot of money on the 58 percent. They still need that 42 percent. The credit industry works best when everyone has a credit card. That only happens when most places take credit cards. And that requires not only huge volume, but also credit card penetration across different segments of society. Credit cards have to be the norm everywhere if everyone is going to have credit cards and that 58 percent is going to contain the maximum number of people."
Michael Hiltzik acknowledges that card companies "have been guilty of genuinely sleazy behavior," but he's compelled to stick up for them on some fundamentals: "Certain purported sins, such as raising rates and cutting credit limits for some borrowers, merely ratchet back the loose standards that helped lead us to economic perdition. For years we cursed the banks for showering Americans with easy credit. Now we curse them for tightening up."
Dear John Thain is "worried that legislators have managed to put restrictions and requirements on credit card companies without taking the last step: making them ineligible to be waived in boiler-plate language." Salmon responds.
Oh, by the way, Republicans managed to tack a completely unrelated gun rights measure onto the Credit Cardholders' Bill of Rights Act of 2009. This left Joshua Morgan Brown irate: "How much easier this economic environment would be on us all if only we could walk into National Parks with LOADED weapons. I mean, yeah, I guess it's pretty cool to be able to visit Jellystone Park with an empty gun, but loaded? Now that’s stimulus."
Personal finance corner: While you wait for the reforms to kick in, Consumer Reports has some suggestions for how to immediately negotiate better terms if you feel your card issuer has unfairly changed your rate terms.
And finally, don't miss Colbert's take on the bill -- his credit card just got pre-approved for its own credit card!
