Pros and Cons of the New Credit Card Bill of Rights

On May 22, 2009 President Obama signed the Credit Card Bill of Rights into law.  The final law was a compromise between the House version and the stricter Senate bill designed to reverse some of the billing practices of the credit card industry.

On the face of it, the bill looks like a good deal for consumers, particularly those who manage their credit responsibly.  However, the law does not go into effect until February 2010 and that's a fact that is not lost on the banks.  What are the banks facing?  Last year Americans paid over $11 billion in fees, not interest rates but fees, and the ability to charge that kind of money is going to be hampered by the new law.  Here are the highlights:

• Rate increases cannot be applied retroactively on existing balances.  This means when a rate increase is allowed, and that has been trimmed back, it can only be applied to purchases going forward.  This is a huge loss of revenue to the banks who currently can increase the rate on all balances at any time with or without reason.
• No more double cycle billing.  Currently, banks calculate the interest owed based on the balance of the last two months even if the previous month had been paid in full.  Eliminating this ability to double bill obviously will reduce interest revenue for the banks.
• No more over the limit fees.  Today, if a consumer is near his credit limit and makes a purchase that puts him over the limit, the bank will honor the charge but will hit the consumer with a hefty over the limit fee that the consumer usually isn't aware of until he gets his statement.  The new law would prohibit this practice unless the consumer explicitly requests it.  Now if the consumer goes over the limit the card will simply be disapproved and the charge will not go through.
• No more applying payments to the lowest interest rate first.  If the consumer has multiple interest rates (promotional, transfer, purchases etc) the amount of the payment that is over the minimum payment due will be applied to the highest interest rate rather than the lowest as is currently the practice.
• Consumers can not be charged a fee for paying their bill.  Some cards charge the consumer for making their payment by other than mail.  Charging for paying online or by phone or electronic transfer will not be permitted when the bill becomes active.
• Credit cards for minors will be more difficult to issue.  Kiddie cards and cards for college students will be much tougher to issue.  Persons under 21 have to be able to demonstrate that they have the means to repay their credit card bill or have their parents co-sign for them.

There are other restrictions as well including locking in interest rates for 12 months, but those listed above are the ones that will have significant impact on a bank's income.

The banking industry is predicting some dire consequences as a result of this new regulation of their previously unregulated business.  Banks are obviously for profit organizations and they have to come up with new revenue streams to replace revenue lost to the new law.  Among the predictions are:

• A return of card fees.  Currently only 20% of the card issuers require a fee to open and keep the account.  Industry experts are predicting a return to this practice with card fees running between $50 and $100 per year.
• Tightening of credit.  Banks have suffered their biggest default rates ever, and as a result predict it will become ever more difficult to qualify for credit and limits will be significantly lower. (Editor's note: Does this mean they will only issue cards to people that have demonstrated they can handle credit responsibly rather than mass market to anyone who is breathing? DUH)
• Reduction or elimination of rewards programs. Reward programs are designed to cost the banks 1% of a consumers balance.  With the elimination of other fees, expect to see reward programs to be greatly modified or go away completely.
• Higher transfer fees.  Bank promotional balance tranfers are likely to cost more.  Bank of America and Discover are already planning fees in the 2% to 3% range.  Similarly, using one of the credit card checks that show up in the mail monthly, will have new fees associated with them.

Consumers can expect to see more bad news between now and when the law kicks in.  Predictions are for a rash of interest rate increases and a reduction of existing credit limits.  In the long run, this new law will best benefit people with excellent credit as every bank will be trying to attract them.  The average consumer, unless they can quickly pay off their existing balances, will likely watch their balances grow as new increases hit both new purchases and existing balances.