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New Credit Law May Squeeze Cardholders

The best credit card customers may see interest rates rise, annual fees reappear and rewards programs shrivel as the sweeping credit reform bill Congress approved Wednesday sends banks scrambling to recoup losses and manage risks, industry experts predict.

But consumer advocates say that overall the bill would provide fairness to all credit card users and would save most of them money.

The House voted 361-64 to send the bill to President Obama, who has said he wants to sign it by Memorial Day. The action came one day after the Senate approved the measure on a 90-5 vote.

“The new reforms are a fundamental overhaul of the industry,” said Peter Garuccio, a spokesman for the American Bankers Association. “They’re the biggest reforms since the advent of the credit card. They require a change in the business model.”

Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry group, says the new law will restrict lenders from tailoring credit card interest rates and terms to an individual borrower’s risk profile. That means consumers in good standing, as well as those who are delinquent, will be hit by higher rates to compensate for the “one-size-fits-all pricing.”

Even before the bill’s passage, companies started to squeeze cardholders in other ways. An estimated 10 million people holding cards from the eight largest issuers have already seen interest rate hikes of as much as 10 percentage points, according to the Center for Responsible Lending (CRL). The issuers—Citigroup, Bank of America, Capital One, HSBC, Discover, American Express, JPMorgan Chase and Wells Fargo—sent out rate increase notices after the Federal Reserve Board in December approved new rules restricting how credit card companies do business. Those rules, which are similar but less stringent than the new reforms, become effective July 1, 2010.

After the law takes effect, Talbott says, expect to see a return of annual fees or a decrease in the rewards program even for those who charge and pay off their bills each month. “Credit card lending is the riskiest type of lending—there’s no collateral,” he says. “Banks are trying to account for that risk.”

He warned that the law also will lead to lower credit lines—or no credit at all—for some low- and moderate-income consumers.

That’s because the law will make lending riskier for banks, Talbott said. “If an average interest rate on a card is 10 percent, under the new law [issuers] won’t be able to change the terms of interest rates, so they’ll start off at 15 percent” for new applicants, he said. “Those consumers who would’ve qualified for credit based on a lesser interest rate, 10, 11 or 12 percent, will now be denied credit at 15 percent because their income level doesn’t support that interest rate,” he said.

Consumer advocates say they don’t believe that higher costs and restricted credit availability will be widespread as a result of the new reforms. But they note that most of the provisions in the new law take effect nine months after it is signed, and argue that consumers need help from lenders’ indiscriminate rate hikes and other abuses now.

“Whenever the industry is about to get regulated, they bring up all kinds of scare tactics like [saying] consumers are going to have to pay more,” said Susanna Montezemolo, vice president for federal affairs at the CRL. “They’re making huge profits based on fees that are deceptive and misleading. Now they’re going to have to let consumers know ahead of time what their interest rates will be. I’d say that’s going to save consumers money.”

“The hidden traps and tricks that were in tiny print that no one can read will become much more transparent,” she says. “Borrowers will be able to make better choices for themselves.”

Pam Banks, senior policy counsel for Consumers Union, says she expects consumers to ultimately benefit from a more competitive business model as credit card issuers seek to retain credit-worthy cardholders.

“I think this will increase competition among the banks to try to keep good customers,” she says. “Customers may be able to get even more perks because there will be a set of people banks look for.”

If interest rates do become onerous stemming from the new reforms, Banks says, consumers may start to abandon credit cards and use debit cards and cash instead to pay for expenses.

“Credit card companies have an obligation to present fair terms that customers can understand and rely upon to manage their accounts,” she says. “Consumers have a responsibility to first afford the credit and then pay on time.

“This is not about trying to cut consumers off from cards,” she says. “It’s just evening out the playing field so consumers have a sense they can control their own destiny.”

The new bill, which becomes effective in February 2010, makes fundamental changes in how consumers obtain credit cards, use them and pay the bills:

* Rate increases: A cardholder’s annual percentage rate generally cannot be increased unless a written warning is provided 45 days in advance. No rate increase can take place until the account has been open a year. These provisions take effect 90 days after the bill is signed into law.

* Existing balances: Interest rates, fees and finance charges cannot be increased on any existing card balance with some exceptions, such as the expiration of a promotional rate or if the cardholder fails to make a minimum payment.

* Due dates: The payment due date must be on the same day each month, and if it falls on a weekend or holiday, a payment is on time if it is received on the first subsequent business day. Statements must be sent at least 21 days before the payment due date.

* Highest rate paid first: If different interest rates apply to the same balance, any payment in excess of the minimum must be applied to the balance with the highest rate.

* Double-cycle billing: No finance charge is permitted on balances from any billing cycle before the current one.

* Young consumers: No credit card solicitation can be sent to a person under 21. No card can be issued to a person under 21 unless the person has a cosigner or demonstrates financial independence. The credit line for a college student under 21 with a cosigner cannot be increased unless the cosigner approves.

* Gift cards: Bars fees for lack of activity unless the card has not been used for 12 consecutive months. Gift cards cannot expire until five years after they are issued.

The bill also contains one unrelated measure that allows people to carry loaded, concealed weapons into national parks.

Carole Fleck is a senior editor at the AARP Bulletin.


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