What's Wrong With Credit Card Reform?

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Proposed rules for credit card reform would limit excessive fees and interest rate increases, and otherwise protect cardholders. But, argues the American Bankers Association, the rules may actually be negative as lenders attempt to make up for lost revenue, says ABA spokesman Peter Garuccio.

Here's what the bank organization says about the new rules in the works:

MainStreet: Why are credit card companies cutting credit limits?
Garuccio: Banks that make credit card loans have got to get the money from somewhere.  Investors are sitting on the sidelines.  They’ve pulled out of [credit card underwriting] and the cost associated with making credit card loans has gone up, or you can’t make as many loans, so credit lines are cut.

Companies don’t cut limits to below outstanding balances, but they might lower it to be very close to your outstanding balance. 

How will banks make up the revenue lost when people walk away from their debts (reportedly $395 billion over the next five years)? Charging annual fees? Taking away card rewards?
I wouldn’t want to speculate, but they’re all possibilities.  It’s like how riskier drivers pay more for car insurance.  The same is true in the credit card market. 

The Fed has said that, for the first 12 months of a credit card relationship, you can’t adjust the APR at all, but people’s credit card [habits] could change in a short period of time.  To cover potential losses is to increase fees on the whole.  If you can’t adjust premiums for a riskier driver. It costs the rest of us who are driving safely a little more.

If more credit cards require annual fees, how much will they charge?

It’s anybody’s guess where they could go.

Right now, the accounts that carry annual fees are tied to a rewards program. But there’s definitely a possibility that there will be annual fees even without a rewards program.  It’s going to depend on the individual issuers.  I think it’s fairly safe to say that it’s possible that all credit card issuers could require annual fees.


Will there be changes in the minimum credit score need to get a new credit card?
We’ve already seen that, obviously in an economic downturn, the risks associated with lending go up, which would suggest that standards are tightening a little bit.  People with great scores will always be able to get the credit they need.  The real impact is going to be on the lower end of the spectrum.

It’s possible that subprime credit cards will go away. It doesn’t have as much to do with [the required reduction in] fees as it does with the business model.  The ability to price for credit risk is limited, and an individual credit profile can change significantly over a short period of time.

Under the system we have today, you can take 20 people with a limited credit history, you can offer all of them a credit card with the same interest rate and you know one will have problems.  When that one person becomes riskier, you can adjust. But under the [proposed] regulations, they’ll all have to pay a little more from the get-go [to hedge against that risk].

What should consumers expect before legislation takes effect?
Between now and then it’s going to depend on the broader economic forces at work. If things get worse, the risks associated with credit card lending will get higher.


Related Links:

What the New Credit Card Bill Means for You

Credit Cards Hike Rates Ahead of New Regulations

Credit Limit Cut? Fight Back


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