rotPferd
Senate credit card legislation
May 15, 2009 at 10:44 AM
Senate Credit-Card Legislation Could Crimp Issuers' Growth

Dow Jones

May 13, 2009: 04:58 PM ET

 

BOSTON -(Dow Jones)- Proposed credit-card legislation would put the brakes on the ability of issuers to raise interest rates and impose late fees - the very tools used by card companies to offset rising losses in the current economic slump.

The rules being debated in the Senate would not only deprive card issuers of crucial ammunition but also would threaten to crimp industry growth. One way companies may respond - raise costs for financially sound consumers. The legislation would also probably make card companies cut back on lending to less- creditworthy borrowers.

The new legislation comes at a time when card issuers - such as Capital One Financial Corp. (COF), Bank of America Corp. (BAC), Citigroup Inc. (C), Discover Financial Services (DFS) and American Express Co. (AXP) - are reeling from losses on souring credit-card debt amid rising unemployment and a slumping economy.

The proposed legislation makes "their business model less resilient," says Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. "One of the best parts of this business was the ability to re-price rates based on risk, and that lever will no longer be available to card issuers a year from now."

The proposed legislation includes a bill that caps interest rates banks can charge credit-card users. Another would ban card issuers from raising rates on existing balances unless the consumer is 60 days late on payment.

An amendment also being debated would make it easier for retailers to give discounts to consumers who use cash, checks or debit cards rather than credit cards, depriving banks of lucrative fees associated with credit-card transactions.

The bill is tougher than legislation the House passed and goes well beyond new Federal Reserve rules curbing credit-card practices that will take effect July 2010. The amendments being pushed in the Senate would add even more restrictions on banks.

Senators so far haven't reached a final agreement on which amendments will be offered or a plan to move forward on the bill.

Peter Garuccio, a spokesman at the American Bankers Association, a trade group, said the legislation "represents a fundamental change in the way card companies conduct business."

Restrictions on raising rates take away the issuers' ability to manage risk related to borrowers with patchy credit.

Moreover, in an effort to make up for lost revenue, card issuers could begin charging annual fees and raising rates on foreign exchange transactions, which would affect even the most sound borrowers. Card companies might also scale back lending to those with shaky credit, as the risk of defaults would outweigh gains if the card issuer can no longer raise rates to compensate for the additional risk.

"People who have good credit may have to compensate for people with bad credit," says KBW's Sakhrani. "People may also find credit cards not economically viable."

To be sure, card issuers have moved quickly to hike rates ahead of July next year, when the Federal Reserve's new rules on credit cards kick in.

Top card companies, including JPMorgan Chase & Co. (JPM), Citigroup, Bank of America, Capital One and American Express, are already "raising interest rates on a larger portion of customers than usual and increasing the number of fees they impose," Joshua Frank, a senior researcher at the Center For Responsible Lending, said in a research note Monday. Many cardholders have seen increases of as much as 10 percentage points or more over their existing rate, notes Frank.

But there is concern that card issuers acting hastily in an effort to lessen the impact of the regulation could cause damage.

"If they re-price too fast or too hard," KBW's Sakhrani says, "card issuers could tip over struggling borrowers."

-By Aparajita Saha-Bubna, Dow Jones Newswires

Replies

  • rotPferd
    May 15, 2009 at 10:47 AM

    Personally, I have never had a problem with my CC co. and they have always been helpful and have deducted fees from my account when I asked. However, I am down to only 1 card as of today (I took my DH's one away this a.m. and shredded it). Is anyone else trying to rid themselves of CC's?

  • Della529
    May 15, 2009 at 10:58 AM

    Ok, just wondering...many say that  "if 10% is good enough for God, it's also good enough for the IRS".  So, why shouldn't credit cards be viewed the same?  I'm not alluding that cc companies should be at 10%, just asking a question. 

    Don't get me wrong.  I understand that cc companies are in a for-profit business, but I can remember when "high" interest rates were 18%, and late fees and over-the-limit fees were well below $34.00 each.  Now, there are cc's with 30% which is charged to those who can least afford credit.  Yes, in some instances those rates are a "re-build your credit" type of rate, but if we look at the credit agreements on some of these cards, one late payment can send the rate from below 20% to close to 30%.

    It seems like the cc companies have come to depend on their interest charges and penalties as a profit method.

  • jrdnjstn00
    May 15, 2009 at 11:04 AM

    I'm trying to get rid of a few of mine.I always pay alot more then the minimum and before the due date but I have gotten hit the rate hike.

    A few yrs ago I was close to being maxed out on one card I have, which is now a Chase card. Anyways they sent me a letter saying my limit had been lowered and now I was over my limit because of them lowering it. I was furious! I called them and asked why they did that and the lady said I was a risk factor because I was close to my limit. I told her well now I'm over my limit and you all will tack on over limit fees because you lowered the limit. She then said well you have 30 days to get it under the limit. I had a new card coming and told her that I'd just transfer the balance and not use that card. she just said ok. I ended up paying it off and I rarely use it. I might charge $5-$10 every 4 months on it. I keep it open so my credit looks better.

    I have no idea why they are waiting until July 2010 to do this. This should be done now so banks and credit card issuers don't have time to raise rates. People need this now.


  • rotPferd
    May 15, 2009 at 11:19 AM


    Quoting jrdnjstn00:

    I'm trying to get rid of a few of mine.I always pay alot more then the minimum and before the due date but I have gotten hit the rate hike.

    A few yrs ago I was close to being maxed out on one card I have, which is now a Chase card. Anyways they sent me a letter saying my limit had been lowered and now I was over my limit because of them lowering it. I was furious! I called them and asked why they did that and the lady said I was a risk factor because I was close to my limit. I told her well now I'm over my limit and you all will tack on over limit fees because you lowered the limit. She then said well you have 30 days to get it under the limit. I had a new card coming and told her that I'd just transfer the balance and not use that card. she just said ok. I ended up paying it off and I rarely use it. I might charge $5-$10 every 4 months on it. I keep it open so my credit looks better.

    I have no idea why they are waiting until July 2010 to do this. This should be done now so banks and credit card issuers don't have time to raise rates. People need this now.

     

    HSBC did this exact thing to me a few years back. Luckily I had the $$ to pay it off immediately and closed the acct.

    I think they put things "in effect" in 2010 due to the elections.

  • SunandMoonMom
    May 15, 2009 at 11:47 AM

    We're trying to get rid of all but one "emergency" CC for larger than life expenses.  It's going well, but...in the last few months, two companies have increased their rates drastically.  I do not understand why they are doing so to people who have never defaulted in any way, but the letters stated they are "across the board" increases no matter the status of the consumers' accounts.  I am honestly worried for those who struggle to meet minimums.  I fail to understand how the increases will be helpful to the company or the consumer? (Not an economist by an means!)

    Fortunately, we were given the option to opt out of the new agreements, though one letter arrived too late to do so in writing as required.  Working on that now...

    I have a feeling things are going to get much worse before they improve...