Credit Card Bill Already Affects Consumers

The legislation creates unintended consequences even before most changes are implemented.

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Today's guest post comes from DR, the senior editor of two finance blogs, the Dough Roller and Credit Card Offers IQ.

On May 22, 2009, President Obama signed the Credit Card Accountability, Responsibility and Disclosure Act of 2009, otherwise known as the Credit Card Act of 2009. The White House described the law as "marking a turning point for American consumers and ending the days of unfair rate hikes and hidden fees." While the majority of the law does not go into effect until February 2010, its impact has already been felt in the credit markets. Unfortunately for consumers, the impact has not been exactly what Congress and the President had hoped for.

Over the past month, major credit card issuers have made significant changes to the terms and conditions of their cards. There are numerous reports that card issuers have been raising interest rates, restricting card benefits, and increasing fees in anticipation of the Credit Card Act going into effect. The Washington Post, for example, recently reported that Chase is increasing its required minimum payment from 2 percent to 5 percent, card issuers are increasing balance transfer fees to as much as 5 percent, and interest rates are going up while credit limits are going down.

And all of this raises an important question--How can a new law intended to help consumers have, at least in the short term, the opposite effect? Let's take a look at two of the Act's key provisions to understand why the credit card companies have reacted the way they have.

Interest Rate Increases: The Credit Card Act of 2009 severely restricts a credit card company's ability to increase the interest rate on existing balances. In fact, the Act describes just three circumstances where rates on existing balances can be increased: (1) when the interest rate is variable and the underlying index used to determine the rate changes, (2) a promotional rate period ends, or (3) if the minimum payment is not received within 60 days after the due date.

The credit card companies have made several changes in response to these new restrictions. First, fixed rate cards are becoming a thing of the past. Major credit card issuers have moved to variable rate cards to help insulate their portfolio from interest rate risk. J.P. Morgan and Bank of America are just the latest examples of card issuers moving to variable rates. Second, interest rates on cards have gone up sharply, even while other rates have remained historically low. The increases have led Senator Schumer (D-NY) to ask the Federal Reserve to use its emergency powers to immediately limit rate increases. The Fed has so far not obliged, perhaps because of the additional unintended consequences such a move would have on the credit card industry. Third, some credit cards have increased the minimum monthly payment due in an effort to force consumers to pay down their existing balances faster. While a minimum payment of 2 percent of the outstanding balance was common before the Credit Card Act of 2009 passed, now some card issuers are requiring payments as high as 5 percent of the balance.

Balance Transfer Offers: The Act made a significant change to no interest balance transfers. Today, when a consumer takes advantage of a balance transfer offer and also makes purchases on the card at the regular interest rate, any payments over the minimum are allocated to the no interest balance transfer. The result is that consumers will pay interest on the purchase balance until the balance transfer is paid in full. The Credit Card Act of 2009 will change all this, requiring with some exceptions credit card companies to apply excess payments to the balance subject to the highest interest rate.

From a policy perspective, this change is sound. The current rules are confusing, and consumers are often unaware that even a small purchase can result in substantial interest rate charges until the balance transfer is paid. But the new rule does come at a cost for consumers. Having tracked 0 percent balance transfer offers for nearly two years, it is clear that the terms have never been as unfavorable for consumers as they are today. First, the introductory 0 percent interest rates on transfers do not last as long as they once did. Before the passage of the Act, 12-month balance transfers were common. Now many card issuers have reduced the introductory period to six months, Discover Card and Citi being two prime examples. Second, balance transfer fees have gone up significantly. While 3% was common before the passage of the Act, now some cards are raising these fees to as high as 5 percent.

The Credit Card Act of 2009 is similar to an insurance policy. It protects certain consumers from rate increases, fees and other adverse actions by the credit card industry. But like all insurance, it comes at a steep price. Consumers are paying that price now, even before the Act takes effect.