May 24, 2009 / 6:51 AM / 10 years ago

Credit card bill not all good for consumers

CHICAGO (Reuters) - The credit card bill signed into law Friday by President Barack Obama will hurt an industry condemned for nickel-and-diming its cardholders, but falls well short of being a panacea to recession-battered consumers.

Bank of America Corp, Capital One Financial Corp, Citigroup Inc, JPMorgan Chase & Co and other card lenders will face new restrictions on rates and fees and be required to improve both the amount and speed of their disclosures.

That would pressure an industry already experiencing heavy losses from the roughly 90 million households that carry cards. These losses are expected to worsen as the year wears on.

“Issuers have taken a body blow,” said Bill Hardekopf, chief executive of LowCards.com, a credit card comparison website. “They have to make up some of this lost revenue. They are for-profit companies and their shareholders expect it.”

Yet the law does not set absolute limits on rates and fees, which issuers have real incentives to raise.

The economy is not yet in recovery and some issuers, including American Express Co, have reported that more than 10 percent of cardholders’ debt may never be repaid.

“A lot of consumers have a false sense of security they’re going to get relief,” said Curtis Arnold, founder of CardRatings.com in Little Rock, Arkansas. “The average rate now is 13.8 percent and I could see it going north of 15 percent by early next year. When issuers report charge-off rates in the double digits, it’s scary stuff.”

At a White House signing ceremony, Obama said card companies must uphold “basic standards of fairness, transparency and accountability.

“We expect consumers to live within their means and pay what they owe,” Obama said. “But we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives.”

RELIEF, BUT NOT EVERYWHERE

Riskier borrowers are likely to see the greatest relief.

Card companies will have to wait to raise rates on existing balances until borrowers are 60 days late. They must also apply payments in excess of minimums first to balances with higher interest rates and will be unable to jack up rates when customers fall behind on other accounts. Issuers cannot charge over-the-limit fees unless customers ask for the extra credit.

Some people who pay bills fairly fast will also benefit.

“Double-cycle” billing, where issuers look at balances over a two-month period to calculate finance charges, is out. Issuers that use “risk-based pricing” to raise rates must use that method to lower rates on healthy borrowers. And some rules that punished customers whose timely payments got stuck in the mail or lost in card companies’ files are also going away.

But issuers can make up lost revenue from customers who are new or have good credit. This includes the roughly one-third of cardholders who generally pay bills on time.

Issuers might charge new customers higher rates at the outset. They might also reduce credit limits, or make it harder to obtain reward perks. Hardekopf expects a resurgence in the annual fee, which he said only one in five cards has now.

Robert Hammer, who advises card companies as chairman of RK Hammer Investment Bankers in Thousand Oaks, California, expects issuers to slash at least 10 percent of what he said was the $934 billion of credit they extend now.

“The legislation paints such a broad brush, by making every bank part of the evil empire,” he said. “It will cost the industry $10 billion a year. That will have a sweeping impact on an industry already crippled by the economy.”

Analysts note also that the law does not lower interchange fees, which banks collect indirectly from merchants when customers use cards. Some of this gets passed on to consumers as higher costs for merchandise and services.

“Card companies are going to raise rates regardless,” said Robert Manning, author of “Credit Card Nation: The Consequences of America’s Dangerous Addiction to Credit.”

RATES RISE, CREDIT AVAILABILITY DROPS

Many cardholders are already feeling the heat.

Earlier this month, Advanta Corp said it will stop lending to its 1 million small-business cardholders after roughly one-fifth of its debt became uncollectible.

Ordinary consumers are also seeing cutbacks. Bank of America, for example, is reducing credit limits for some customers based on their history of using plastic, including the frequency with which they charge purchases.

The retailer Target Corp, meanwhile, has curtailed credit for customers in good standing, but who live in states hit hard by the housing slump, such as Arizona and Nevada.

And Hammer said the $39 fee on many late payments could rise to $49 within a couple of years.

Arnold expects card companies to be busy in the next nine months.

“There’s no doubt issues will take preemptive strikes to prepare for what will be a different card industry, with a different face,” he added.

Reporting by Jonathan Stempel; Additional reporting by Martha Graybow in New York and Nicole Maestri in San Francisco; Editing by Andre Grenon

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