Rightfully yours

Credit cards have been a good deal for those people who pay their bills on time and in full each month.

The best customers have received paybacks for being good customers – benefits like cash-back rewards and frequent flier miles.

The not-so-best customers have received penalizing fees and penalties for being late with their payments, or over-limit on their cards.  Some of those fees drive the cards over the customer’s limit again, to have more fees applied.

What’s the size of the problem?  Americans owed more than $945 billion in March for credit card debt alone.  Even though that reflects a hefty pullback due to the recession, credit card debt has risen about 25 percent in the last ten years.  Nearly 80 percent of American families owe more than $7,000 on their plastic. 

Money generated by credit card penalty fees like late and over-limit charges have increased in recent years by about $1 billion annually, and should top $20 billion this year.

Fifty million people are in the best customer camp, while double that number are struggling with their payments.
 

The House of Representatives just voted 361-64 to approve the “credit cardholder bill of rights.”  In this bill, Congress is limiting the penalties to struggling borrowers, restricting the ability to raise interest rates on existing balances and impose unfair penalties. 

This credit card reform has broad appeal with many consumers stalled in credit card debt and angry with card issuers for gouging them through excessive fees.  President Obama and Congress have seized the opportunity to pass banking reforms that industry lobbyists helped defeat when the economy was booming.

Not to be left out, Republicans bartered their votes for an amendment that will allow citizens to carry loaded firearms inside National parks.  (?)  The combined bill is scheduled to be signed by the President on Friday, and will take full effect in February 2010, although some provisions will activate earlier.

This bill, representing a major victory for President Obama and Democrats, is a counterattack against credit card companies after years of abuse that angered consumers and lawmakers alike, including rate and fee increases, and aggressive marketing tactics to consumers including children.
 

Banks initially only issued credit cards to their best consumers and charged them a flat interest rate of about 20 percent plus an annual fee.

With the standardization and accessibility of credit scores in the late 1980s, the banks began to offer a variety of fees and interest rates, tied to the credit score of the customer.  Aligning risk with interest reduced rates for the best customers, but increased rates for the not-so-best.

When two-thirds of the cardholders were classified as “risky,” they became a significant source of untapped revenue.  Similar in concept to the events leading up to the housing crisis, banks have sought to increase earnings by marketing to everyone who breathes, including children and imprisoned felons.

The impending crisis is what Congress is trying to head off.  The new bill represents only the first of several banking reforms tightening regulatory oversight.

As the recession deepened and cardholders defaulted through bankruptcies or labored at reducing their balances and fees, banks saw a real decrease in easy revenue.  In addition to adding fees and increasing interest rates, banks acted to decrease their risk by decreasing credit limits, both for risky customers and for good customers who were not using their cards.

With the reduced risk came loss of income.  Banks on the verge of failing the government “stress test” cannot afford to lose income, so to make it up, they are now going after their customers with sterling credit. 

The government “stress test” showed that the 19 biggest banks will incur $82 billion in credit card losses in the next two years.  The Federal Reserve passed regulations last December to control unanticipated interest increases that will cost the credit card issuers about $12 billion per year in lost income and associated fees. 

Six institutions are responsible for 80 percent of the credit cards issued: American Express, Bank of America, Capital One, Citigroup, JPMorgan Chase, and A.B.A. Discover.

The credit card bill will impact more consumers than any other of Obama’s economic initiatives.  It has been projected that a major pullback in unsecured credit might extend the recession, but the government is willing to take that chance rather than deal with a new crisis. 

This bill will impact credit card banks who all have their shareholders to report to.  Profits will be hurt, and in the financial maneuvering, banks will become ever more reliant on marginal customer fees in addition to other modifications. 

A Government Accountability Office (GAO) report issued in 2005 estimated that 70 percent of credit card revenue came from interest charges.  The new bill does not place a cap on interest rates, but forces fuller disclosure.

There are millions of families living close to the edge of financial collapse, who rely on their credit cards for cash flow and cannot seem to reduce their balances.
 

Three modifications that will surface immediately from credit card companies will be to:
1.      pull back on good-customer rewards
2.      assess annual fees to all, and
3.      charge interest from the day of purchase with no grace period.

Notices have already gone out to consumers making them aware of these changes.  And if you decide not to pay the annual fee?  Your credit account will be closed, and you’ll still owe the balance with interest accruing.  Your credit score will also likely be reduced with the closing of a credit account.

Credit card companies also receive income from retailers accepting payment with credit cards, and these fees will also be increased.  Angry retailers will be forced to pass the increases on to consumers as they acquire them.

It will certainly change the rules of the game.