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.”