Credit Card Reform: Who Is It Helping?
by Tim Manni
Are you happy about the new credit card reform? Chances are, if you’re a responsible, even quasi-responsible cardholder, the answer may be “no”. While some of new rules have already taken affect, the bulk of the changes don’t begin until February.
Here’s just a few of the upcoming changes:
- Interest rates could not be raised on existing balances unless the borrower was more than 60 days delinquent
- Prohibited “universal default” provisions and double cycle billing
- Better disclosure of fees, card rules and interest costs
As some consumers applaud the changes, the credit card companies have gotten to work making sure that these new profit restrictions will be compensated by new practices.
Here’s how credit card companies are reacting:
- Reduced or eliminated fixed rate credit cards; when interest rates increase, card rates will increase commensurately
- Instituted annual fees, higher balance transfer fees, international transaction fees, higher cash advance fees, reduced award programs, slashed credit limits, canceled over $500 billion dollars in credit lines, summarily closed accounts deemed risky, raised monthly minimum payments and imposed strict standards for new credit cards
- Increased interest rates by as much as 10 percentage points or more across the board, regardless of credit or payment history. Unable to adequately assess risk or price accordingly, every credit card holder was assumed to be a potential default and charged accordingly
Bill Zielinsky, a contributing author at SeekingAlpha.com, makes a compelling argument that the card companies, whom many originally speculated would be financially stunted by the reform, will benefit the most, not the consumers:
What was supposed to be a major consumer protection act has turned into a future profit bonanza for the credit card companies. Many credit card customers may go under financially but the credit card companies will do just fine, judging by the price performance of their shares and their actions taken cited above. The credit card industry has adjusted their business model to the new reality and will prosper.
While the S&P 500 has increased by 52% since March of this year, the stocks of credit card companies have performed dramatically better. Since March 2009, the stocks of companies such as American Express (AXP) and Capital One have tripled in value even as write-offs of credit card debt hover in the 10% range and new restrictions on credit card companies become law.
Perhaps what’s most ironic is that the most risky cardholders — the audience the rules seems to cater to the most — have already been weeded out to a great degree by the card companies (”canceled over $500 billion dollars in credit lines”). So, those that are left standing — the nation’s more responsible cardholders — may be left saying the same thing as Zielinski, “thanks for nothing, Congress.”
