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H.R. 627 The Credit Card Act of 2009 is a sweeping reform of credit card law. Many consumers are concerned over how this act will affect their spending capacity throughout the new year. The act is called into effect in February, meaning consumers will have very little time to determine how to use the act to their advantage.
While there are advantages to the consumer in 2010, the act may also adversely affect the economy, according to some analysts. However, conclusions are anything but cut and dried. For those that need a little more information, here are some details about the way the first serious credit card reform in history may affect you—and the economy at large—in 2010 and beyond.
WHAT IS H.R. 627 – THE CREDIT CARD ACT OF 2009
H.R. 3639 The Expedited Credit Card Accountability, Responsibility, and Disclosure Act of 2009, also known as H.R. 627 The Credit CARD Act of 2009, will dramatically affect regulations on credit cards beginning in 2010. The act aims to improve transparency between credit card companies and the American public, many of whom hold credit cards, under what the government calls an “open-end consumer credit plan.”
The act requires first and foremost for credit card companies to give consumers a month and a half (45 days) of notice if any increases in interest rates are going to be enacted. It also gives card owners the right to cancel their credit cards and pay any outstanding balances once these hikes are enacted.
Credit card companies are prohibited from retroactively increasing their interest rates for cardholders in good standing with the company, and the act does not allow credit card companies to arbitrarily change their agreement with cardholders. Finally, the act prevents companies from imposing unfair or excessive fees on cardholders, which will likely effect those with subprime and secured credit cards.
In summary, the bipartisan measure is meant to protect cardholders from unfair or unclear actions on the part of credit card companies and the big banks like Bank of America (BAC), JP Morgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and etc. along with their nefarious cohort Visa (V).
POSITIVE EFFECTS OF H.R. 627
It is no secret that some credit card companies and big banks have been acting unfairly for years and that the fees they collect from the general public are not clear and reasonable. Unfair fees and interest adjustments have been banned, meaning that consumers will be given information on how credit card companies are changing their terms at least 45 days in advance.
“Overdraft” coverage will also be opt-in instead of opt-out, which means that over limit charges may not be incurred automatically due to consumer unawareness, and that the card may be denied if you are over the limit and this may have a positive effect with credit cards and identification with potential credit report issues.
The terminology of credit card companies must be made clear in advance, with promotions being disclosed in plain and simple language, and terms that do not change during the first year of a contract. Terms of credit cards marketed to youths and college students must be plainly stated by both the company and the university. Finally, fees may not be placed on store credit cards and gift cards which have not been used for a period of time.
NEGATIVE EFFECTS OF H.R. 627
Unfortunately, as with any piece of legislation the CARD act is not without its drawbacks. The reason that companies are able to keep interest rates so low is that they are not accountable to a governing body for the terms of the contracts and promotions that they use to entice customers. Under the credit card act, it is likely that interest rates will rise substantially. This will make new credit cards unobtainable for many individuals with poor or no credit.
No-fee credit cards will likely disappear as a result, and credit score checks, especially on the best credit cards, will probably become stricter, limiting the number of individuals who can apply for new cards. Although many Americans expect a freeze on interest rates until the act takes effect, most credit card companies will continue to raise rates until they are prohibited by law.
The result may be a slowing economy—many individuals expect to buy and borrow on credit; if they cannot, they will not buy at all. Without consumer purchases stimulating economy, the slump could last longer and consumers could end up frustrated with the lack of options. Less spending means less stimulus, and less spending may be the result of the act. This is a good example of credit contraction.
IMPACT ON BANK EARNINGS
Andrew Martin of The New York Times recently wrote an extremely high quality article about the ginormous fees Visa (V) charges and nefarious practices in the credit card industry between Visa, Mastercard and the banks. He wrote:
Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.
Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.
As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.
In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.
“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”
Visa has managed to dominate the debit landscape despite more than a decade of litigation and antitrust investigations into high fees and anticompetitive behavior, including a settlement in 2003 in which Visa paid $2 billion that some predicted would inject more competition into the debit industry.
The Visa, Mastercard and the big banks like Bank of America, Citigroup, etc. are profiting tremendously while charging outrageous fees to merchants and consumers. The populist call is to “Starve the vampire squids!” and that is precisely what this legislation is intended to do. But legislation has an interesting way of working unintended consequences.
This act will likely contribute to a decline in fees and profits for the large banks like Bank of America, Citigroup, Wells Fargo, etc. while also increasing their exposure to credit risk with debtors that are carrying balances and interest rate risk by not being able to maneuver as efficiently in response to interest rate increases by the Federal Reserve. According to Bloomberg Wells Fargo already raised rates while sacrificing about $1B on a bet that interest rates will rise.
The banking industry and credit card companies are facing a public relations nightmare; after all, they get to privatize the gains with massive bonuses while socializing the losses through multi-billion dollar bailouts. Matt Taibbi described it best:
The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
H.R. 627 and H.R. 3639 are intended to be the Nanny State coddling the American public and protecting them from the evil big banks. But this type of legislation will most likely have unintended consequences such as raising the cost of credit, decreasing its availability and preventing the savers, not that there are any real savers and producers in the economy anymore as they have all left for Galt’s Gulch, from being able to efficiently allocate their capital to the entrepreneur.
While I am no fan of the big banks and their vampire squid blood funnel there is an easier way to blunt their beak and starve them while at the same time providing a sound foundation for the American economy: buy gold, silver or platinum, use them as currency and pass H.R. 4248 The Free Competition In Currency Act of 2009 which would repeal the capital gains on the precious metals that is the major deterrent to their circulating as currency in ordinary daily transactions.