President Obama got what he wanted before the Memorial Day Weekend: a highly popular Credit Cardholders Bill of Rights. Its passage elicited fairly strong praise from consumer advocates, although some would have preferred the bill had included Sen. Bernie Sanders’ (D-Vt.) 15 percent interest-rate cap. It also prompted hand wringing from industry officials, who have maintained that new Federal Reserve rules slated to take effect next year were tough enough.
The provisions of the law take effect nine months from last Friday, when Obama signed the bill. Among other things, universal default on existing balance will be banned, interest charges on paid-off balance from previous cycles will be prohibited, issuing cards to those under 21 will be sharply restricted, and greater disclosure of rate terms, and billing details will be required.
Edward L. Yingling, president and chief executive officer of the American Bankers Association gave a nod to a “number of provisions that are tough, but workable,” but went on in a formal statement to warn that the law “fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk.” In brief, higher risk leads to less credit, and that will “often” mean higher interest rates, according to Yingling.
“While unintended, the legislation will have adverse ramifications on creditworthy borrowers who will be restricted or denied access to credit,” according to Camden R. Fine, president and CEO of the Independent Bankers of America.
But John Ulzheimer, president of consumer education at Credit.com sees the law as a net positive for cardholders, because its provisions will go into effect sooner than the Fed’s rules. One key difference between the two approaches is that under the new law “there’s the ability for customers to cure interest rates after missing payments—they can earn back lower rates,” Ulzheimer says. “The noise says that issuers are going to Defcon 5—they’ll raise rates sharply, and slash rewards programs. But there are a whole lot of companies issuing credit cards. It’s very competitive.”
Ulzheimer points to a “tremendous good-guy opportunity. The first big credit card issuer who steps up and says it will implement the changes right now will have an easy win. That’s low-hanging fruit.”
Other observers expect turbulence. Investment bank R.K Hammer, which focuses on the credit card sector, estimates the industry will suffer “$10 billion per year in lost interest income,” says chairman and CEO Robert Hammer. He also expects to see the “curtailment of credit to those at the margin, the exit from the business by those who cannot operate with such restrictive legislation on their business models, and rising fee income.” The firm predicts that the credit card industry will impose $20.5 billion in penalties in 2009, up from $19.1 billion last year.