President Obama called it a landmark consumer protection measure that will put an end to credit card companies’ “deceptive, unfair tactics that hit responsible consumers with unreasonable costs.” The truth is, unfortunately, the opposite: The Credit Card Accountability Responsibility and Disclosure Act (CARD) rules that took effect this week will harm responsible consumers.
Once again, the law of unintended consequences will trump good intentions.
By limiting the lenders’ ability to charge higher interest rates and fees to riskier borrowers, the law will result in lenders treating borrowers with poor credit ratings and a history of late payments almost the same as borrowers with solid credit ratings who pay off their credit card charges on time. This will, in effect, penalize responsible consumers.
While the law limits a credit-card issuer’s ability to raise interest rates after a consumer becomes a customer, it does nothing to prevent lenders from charging high interest rates up front.
There is a reason why credit cards carry high interest rates. Credit cards provide loans that are convenient for borrowers and risky for lenders. Borrowers can get loans up to their credit limit on the spot, no questions asked, and can repay these loans using minimum payments over a long period of time. No other financial product allows people such easy credit access.
On top of this, these loans are unsecured. Should a borrower default, the lender cannot seize any property for repayment. And credit-card balances can be completely discharged in bankruptcy.
Even with credit reports, credit-card companies cannot distinguish bad borrowers from good ones with a sufficient degree of certainty before credit is granted. This was not a major problem for lenders when they could swiftly raise a cardholder’s interest rate after finding the borrower to be a higher risk (when he or she makes a late payment, for example).
The Credit CARD Act, however, outlaws this “try and see” approach, but does nothing to change the risk associated with credit-card loans. It only limits the ability of credit-card companies to collect revenue from risky borrowers to compensate for the risks they represent.
To recapture this revenue, credit-card companies are making changes that affect all borrowers, both responsible and risky ones.
For instance, responsible consumers may face higher interest rates and fees than they paid previously. Some will have to pay new or increased annual fees. And some may see their credit-card bonus features, such as rebates or airline miles, reduced.
Many credit-card companies have already made these changes, in advance of the law going into effect. According to CreditCards.com, the national average interest rate on new credit-card offers topped 14 percent – the highest level since they began tracking rates in 2007 – in the weeks leading up to the law’s implementation. A December 2009 survey by ComScore found that 53 percent of credit- card owners had been notified of interest rate increases, 26 percent had their credit limit decreased, 21 percent were told of increased fees, and 17 percent had rewards programs changed.
Citibank recently told cardholders to expect a $60 annual fee starting April 1. “We understand that customers can be frustrated by new fees, especially in difficult economic times,” said a Citi spokesman. “However this action is necessary given the costs of doing business.”
Credit-card companies also may raise merchant fees. If they do, merchants will probably pass on their added costs to consumers by raising prices. In extreme circumstances, some small retailers may stop accepting credit cards or require a minimum purchase amount to use them.
In the end, if there’s one thing you can bank on, it’s this: The Credit CARD Act – billed as a consumer protection measure – will strip away the benefits of being a responsible borrower and lessen credit availability for all. Laughably, Congress and the White House are taking credit for taking away your credit.
Polina Vlasenko is a research fellow at the American Institute for Economic Research in Great Barrington, Mass.