Credit Card Rules: Boon or Bane? – Analyst Blog

The final provisions of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act that came into effect last Sunday could have longer term repercussions. Though the new rules will protect credit card users from unreasonable late payment fees, interest rate hikes and other penalty fees, these could prove to be more difficult to card holders than before.

 

On May 22, 2009, President Barack Obama signed the CARD Act into law. The Act aims at protecting the average consumer. However, this law threatens the profitability of major card issuers including Citigroup Inc. (C), Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Capital One Financial Corp. (COF) and Discover Financial Services (DFS), since issuing credit at a rate suited to a customer’s risk is a complex process now.

 

So how could the new rules help, and how might they pinch? Here’s a quick look:

 

 

Advantage:  For some consumers, credit card rate could even decrease under the new regulations. If a customer’s credit card interest rate has been increased since January 2009, the new rules require the credit card company to go back and evaluate whether the reasons for the rate hike have changed under the new regulations. If yes, the issuer must reduce the rate. Issuers must also review the rate every six months for accounts that receive a rate hike.

 

Drawback: If an issuer finds that the rate hikes are not necessary, the rate reduction may not restore the old rate. A review could result in a lower reduction than the increase. Also, the evaluations of rate hikes are not applicable for variable rate cards.

 

 

Advantage: According to the new rules, late payment and other penalty fees must be assessed by the card issuers in a way that costs less to cardholders. Issuers are also banned from charging multiple penalty fees for a single event or transaction that violates the cardholder agreement. Additionally, the late fees must not exceed the customer’s monthly minimum required payment or $25, whichever is lower.

 

Drawback: If one of the last six payments has been late, issuers can charge up to $35. Also, if the cost incurred by the issuer due to the late payments justifies a higher fee, they are allowed to charge it.

 

Also, there are no caps on other charges including fees for balance transfers, foreign transactions and cash advances.

 

 

Advantage:  According to the new rules, gift card balances cannot expire for at least five years from the date of purchase. If the card expires physically, the customer can transfer the balance to a new card at no charge. Also, if a gift card holder adds new funds to his/her new card, the total balance of the gift card would be safe for at least another five years.

 

Drawback: If the gift card holder does not use the card for twelve months, he/she will be charged a fee per month.

 

 

Following the enactment of the CARD Act, card issuers are reducing the amount of credit they provide to borrowers. The average credit limit on a new card is now about $3,900, down 11% from about $4,400 a year ago. Though this will force card holders to tighten their purse strings, the lack of spending will restrict the pace of economic recovery. We believe less spending along with the flaws of the CARD Act will cost consumers more than before.