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August 26th, 2009

Credit Card Reform: Who Is It Helping?



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.”

5 Responses to “Credit Card Reform: Who Is It Helping?”

  1. ReduceDebt (Dan@MonteroCredit) Says: August 27th, 2009 at 5:57 pm

    “Credit Card Reform: Who Is It Helping? | HSH Financial News Blog” http://tinyurl.com/llrtzn …

  2. Paul G Says: September 1st, 2009 at 4:05 pm

    Add Barclays Bank Delaware to the list of banks that are taking this opportunity to raise interest rates on good consumers. I have a good credit score and the company is attempting to raise my rates 35% to 18.99%. I will be closing this account. Be warned. Stay away from Barclays Bank credit cards.

  3. Mitch Says: September 6th, 2009 at 12:01 am

    Well, that’s drastically disappointing, isn’t it? I knew the credit card companies would figure something out, but not this type of thing. However, fewer people getting credit might be a good thing in the long run. Less outstanding debt from people who really couldn’t afford it, fewer mailings going out randomly which means we’ll be left alone more, and, if you’re like me, canceling credit cards that are doing this type of thing to us, or at least some of them.

  4. Tim Manni Says: September 8th, 2009 at 11:03 am

    Hey Mitch, When I was writing this post a light bulb went off in my head (and not the good kind, the kind that makes you say “aw crap”). When I wrote that ‘it was likely that a majority of the credit card customers that this bill has tried to protect have already been dropped’…I thought, who’s left? Who’s left are people that will benefit the least. Not good, “drastically disappointing” indeed. Good hearing from you, thanks for commenting, Tim

  5. Tim Manni Says: September 8th, 2009 at 11:23 am

    Thanks for your comment Paul.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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