When President Obama signed the Credit Card Bill of Rights last May he signaled a new era in how banks do business. The final law was a compromise between the House bill and the stricter Senate version and is designed to change the way credit card companies bill their customers.
Heralded as a win for the consumer, the Act will best serve those consumers who manage their credit cards responsibly. However the law does not go into effect until February 2010 which gives the banks an opportunity to maximize their current billing strategy. Considering that last year Americans paid over $11 billion dollars in fees (not interest rates) and that the new law is going to greatly restrict the billing practices that generated those fees, the banks have to scramble to come up with new revenue streams. Here’s how the law affects consumers and banks:
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.
- Double Cycle Billing will be a thing of the past. The bill strictly forbids charging interest on a balance that has been previously paid. Currently banks compute interest base on the last 2 months of billing even if the previous month had been paid in full. The new bill prohibits this practice.
- Over Limit Fees will be a thing of the past. Unless the consumer explicitly opts into an over limit program, card holders who attempt to go over their credit limit will simply have the charge declined. Currently most banks would allow the charge to go through and then charge an over the limit fee. Often times the first time a consumer would know he was over the limit is when he sees the fee on his statement.
- Credit card payments will be applied differently If a consumer has multiple rates in his account, the amount of his payment that is over the minimum due will be applied to the highest rate account. Credit card companies currently apply all of the payment to the lowest interest rate account leaving the higher rates untouched and accumulating more interest.
- Online bill payments cannot be subject to a fee. Payments made online or by electronic transfer or by phone can not be charged a fee. This reverses a practice of many credit card issuers. Card statements must be delivered to the consumer at least 21 days before the payment is due.
- Minors will have to prove they can pay their bill. Persons under 21 will have to show they have a source of income in order to be issued a credit card. Parent’s can co-sign on the agreement to get around this requirement.
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:
- Credit Card Charges. Reliving the 80’s and charging for the credit card account is an easy way for banks to make up some of the lost revenue. Annual charges of $50 to $100 are predicted by the banking industry.
- Less credit access. Reversing their practice of 20 years of granting instant approval and pre-appoval, the banks now predict that only people who have demonstrated responsible handling of credit will get credit. In other words there will be a loud banging noise as they slam the barn door shut.
- Goodbye frequent flier programs Reward programs typically cost the banks 1% of the balance of the account. Expect this plans to be scaled back or eliminated all together. The same will apply for the cash back offers.
- 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.
The new law does not kick in until February 2010 so consumers should brace for another round of rate increases on their current cards. In addition, credit limits will most likely be reduced regardless of history. Over the long run, this law will make banks more responsible in their lending and competitive. However, in the immediate future, many consumers will sit by helplessly and watch their balances grow as interest rates outpace their ability to pay the balance down.