Credit card bill not all good for consumers
Written on May 24, 2009
The credit card bill signed into law Friday by President Barack Obama will hurt an industry condemned for nickel-and-diming its cardholders, but falls well short of being a panacea to recession-battered consumers.
Bank of America Corp, Capital One Financial Corp, Citigroup Inc, JPMorgan Chase & Co and other card lenders will face new restrictions on rates and fees and be required to improve both the amount and speed of their disclosures.
That would pressure an industry already experiencing heavy losses from the roughly 90 million households that carry cards. These losses are expected to worsen as the year wears on.
“Issuers have taken a body blow,” said Bill Hardekopf, chief executive of LowCards.com, a credit card comparison website. “They have to make up some of this lost revenue. They are for-profit companies and their shareholders expect it.”
Yet the law does not set absolute limits on rates and fees, which issuers have real incentives to raise.
The economy is not yet in recovery and some issuers, including American Express Co, have reported that more than 10 percent of cardholders’ debt may never be repaid.
“A lot of consumers have a false sense of security they’re going to get relief,” said Curtis Arnold, founder of CardRatings.com in Little Rock, Arkansas. “The average rate now is 13.8 percent and I could see it going north of 15 percent by early next year. When issuers report charge-off rates in the double digits, it’s scary stuff.”
At a White House signing ceremony, Obama said card companies must uphold “basic standards of fairness, transparency and accountability cash advance loan.
“We expect consumers to live within their means and pay what they owe,” Obama said. “But we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives.”
RELIEF, BUT NOT EVERYWHERE
Riskier borrowers are likely to see the greatest relief.
Card companies will have to wait to raise rates on existing balances until borrowers are 60 days late. They must also apply payments in excess of minimums first to balances with higher interest rates and will be unable to jack up rates when customers fall behind on other accounts. Issuers cannot charge over-the-limit fees unless customers ask for the extra credit.
Some people who pay bills fairly fast will also benefit.
“Double-cycle” billing, where issuers look at balances over a two-month period to calculate finance charges, is out. Issuers that use “risk-based pricing” to raise rates must use that method to lower rates on healthy borrowers. And some rules that punished customers whose timely payments got stuck in the mail or lost in card companies’ files are also going away.
But issuers can make up lost revenue from customers who are new or have good credit. This includes the roughly one-third of cardholders who generally pay bills on time.
Filed in: business.