They Warned US (and the Fed’s Aren’t Coming to Rescue)

After lobbying aggressively against its passage credit card issuers gave two warnings about the Credit Card Accountability, Responsibility and Disclosure Act of 2009; that interest rates on their cards would have to increase and that the availability of credit would diminish. On May 22, 2009, President Obama signed the bill and the issuers have been making good on their warnings ever since. Administration officials feted the law’s passage as "marking a turning point for American consumers and ending the days of unfair rate hikes and hidden fees." Unfortunately for those the bill was meant to protect, its impact has not matched its intent, as consumers reel from the hikes in rates, fees, and payments being put in by credit card issuers prior to the law’s provisions going into effect. Since the bill’s signing, issuers have made, and continue to make wholesale changes to their cards ranging from fee hikes to switching accounts from fixed to variable interest rates. Other changes include the restriction of card benefits and steep rate increases as the credit card companies race to set their pre-regulation benchmarks before the provisions take hold. One increase which will cause immediate pain for a set of card holders is Chase’s increase of its required minimum payment from 2 percent to 5 percent. Issuers are also hiking balance transfer fees by 60% to 100% as they cut credit limits across the board. What happened? How could a bill with such honorable intentions make things so much worse, at least in the short term, for the most vulnerable card holders? Part of the answer lies in the allowance of time for credit card companies to get ready for the regulations to take effect. The problem for consumers is that the time allowance also gave the issuers a gaping window to set the table for themselves in terms of raising expenses, changing grace periods, and limiting available credit. These reactions are related directly to two of the main provisions of the bill. The headline provision of the bill is aimed directly at restricting issuers’ ability to raise interest rates in an unchecked fashion on existing balances. The restrictions are tighter on fixed accounts so credit card companies are responding by moving their fixed accounts to variables. Chase and Bank of America have already sent notices out to many of their fixed account card holders notifying them of the change to variable accounts. Another reason for the move to variable accounts is that interest rates in general are at cycle lows and can’t go much lower. The switch away from fixed accounts will allow issuers to raise rates immediately should benchmarks start adjusting higher. Issuers are also expected to increase the margins that they charge above the benchmarks prior to the provisions taking effect. Many credit card holders, in addition to their interest rates going higher, are also getting squeezed by the increased minimum payments and other changes such as the elimination of grace periods on purchases. Particularly galling to credit card holders is the explanation of higher minimum payments as a method of getting holders to pay off their balances more quickly as increases in rates and fees tack more to their balances each month. rnOne of the other changes deals with treatment of no interest balance transfers. Historically, when a consumer engages in a balance transfer offer and then makes purchases on the card at the regular interest rate, any payments in excess of the minimum payment are directed toward reducing the balance which is not being charged interest. The net result has been that interest accrues on the purchase balance until the balance which was transferred in is paid in full. The new bill changes this by directing credit card companies to apply excess payments to the balance subject to the highest interest rate. Issuers have reacted to that change by tightening terms on zero interest balance transfers considerably. Usually a year in duration, the transfers are typically offered for only six months and will be much tougher to get approved. Secondly, balance transfer fees are going up from the 3% area to as high as 5%. While the Credit Card Act was designed with positive intentions, the loopholes in its design have allowed credit card companies enough time to make everything more expensive for their card holders while pointing the blame at policymakers for forcing them to do it. Senator Charles Schumer, realizing too late that consumers were going the pay a steep price for the sloppy implementation of the bill, has been asking the Federal Reserve to step in to stop the issuers from making a mockery of the bill and the politicians that passed it, including those in the Obama administration that pressed hard for its passage. The Fed has declined to acquiesce to Schumer’s pleas. It’s not a surprise, considering that they’re all bankers.