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The Credit Card Accountability, Responsibility and Disclosure Act President Obama signed into law last week likely will hurt card issuers' near-term profits, but eventually the industry should return to profits near "historical" ratios, Moody's Investors Service said in a report issued this week. Most provisions of the new law, which places restrictions on penalty interest rates and fees, go into effect in February (CardLine 5/20). In its weekly credit outlook, Moody's wrote that, although credit card profits may remain "slightly lower" as a result of the new restrictions, the industry ultimately will consist of "a smaller universe of higher-quality credit card receivables" when the economic downturn subsides. Although some issuers may broadly increase average interest-rate percentages on cardholders' accounts and return to charging annual fees to adapt to the law's restrictions, that strategy could backfire, Moody's says. "Rate hikes may become less effective as the economy worsens," Moody's wrote, adding that cardholders unable to withstand higher interest rates and a host of new fees might switch to "more accommodating" card issuers. Card issuers also should be wary of reducing borrowers' credit lines too severely to protect against further defaults and charge-offs. Borrowers most at risk of defaulting typically use a relatively high proportion of their available credit line, and reducing these lines too aggressively could cause some cardholders to "accelerate to delinquency," Moody's says. Card issuers also may reduce marketing and promotion budgets and cut operating expenses to cope, Moody's says.
