Conventional wisdom in and around Washington, D.C. is that the credit card legislation that passed the Senate yesterday is a big win for consumers. On an overwhelming majority of 90-5, the measure passed the Senate and is on its way to the White House. Rep. Carolyn Maloney, D-N.Y., who had sponsored a similar measure that passed the House earlier this month, said, “Today is a victory for all credit cardholders.”
But is that right? Is the credit card legislation a victory for all cardholders? While the measure certainly has some benefits for consumers, it will likely make credit cards harder to get, more expensive for some, and less rewarding. So let’s clear away all the political hype that surrounds credit card reform, and evaluate who the winners and losers really are.
Summary of the Credit Card Accountability, Responsibility and Disclosure Act
The version of the credit card bill that passed the Senate, called the Credit Card Accountability, Responsibility and Disclosure Act, includes a number of provisions dealing with the interest rates card issuers can charge:
Limited interest rate increases: Interest rate increases on existing balances would be allowed only under certain conditions, such as when a promotional rate ends (think balance transfer), there is a variable rate or if the cardholder makes a late payment. Interest rates on new transactions can increase only after the first year. Cardholders must be given 45 days’ notice before significant terms are changed.
Universal default is gone: Universal default, which is the practice of raising interest rates on customers based on their payment records with other creditors, would end.
Highest interest balances paid first: When consumers have balances that carry different interest rates (e.g., a balance transfer at 0% and regular purchases at 10%), payments in excess of the minimum amount due must go to balances with higher interest rates first. Currently, credit card issuers apply excess payments to the balances with the lowest interest rate.
No more double-cycle billing: Double-cycle billing is the practice of computing finance charges based in part on the balance from a previous billing cycle. As a result, consumers can pay interest on balances they have already paid off. Most major credit cards no longer use double-cycle billing. Nevertheless, the credit card legislation would put an end to the practice.
Minimum payments: Credit card issuers must disclose to cardholders how long it would take to pay off the entire balance if users only made the minimum monthly payment. Issuers must also provide information on how much users must pay each month if they want to pay off their balances with 12, 24 or 36 months, including the amount of interest.
In addition to interest rates and related provisions, the credit card reform bill has a number of provisions relating to credit card bills and fees:
More time to pay monthly bills: Credit card issuers would have to give card account holders “a reasonable amount of time” to make payments on monthly bills. That means payments would be due at least 21 days after they are mailed or delivered. Consumers have complained about due dates that change without notice or are moved up, giving them less time to pay their bills and increasing the likelihood of late fees.
Clearer due dates and times: Credit card issuers would no longer be able to set early morning or other arbitrary deadlines for payments. Cut-off times set before 5 p.m. on the payment due dates would be illegal under the new law. Payments due at those times or on weekends, holidays or when the card issuer is closed for business will not be subject to late fees.
Limits on over-limit fees: Consumers would be able to have transactions rejected if they exceed their credit limits, thus avoiding over-limit fees. Fees charged for going over the limit must be reasonable.
Subprime credit cards for people with bad credit: People who get subprime credit cards are typically charged a significant fee to obtain the card. Under the new law, these upfront fees cannot exceed 25 percent of the available credit limit in the first year of the card.
Promotional rates: Promotional rates, such as those offered for balance transfers or purchases, must last at least six months.
Card for young adults: The Senate bill eliminates credit cards for people under the age of 21 unless an adult co-signs or they can show proof of income.
Winners & Losers
The Act’s benefits largely depend on whether a cardholder is a “deadbeat” or a “revolver.” A deadbeat is the term used by the industry to describe those that pay off their balances every month. A revolver carries a balance from month to month.
The vast majority of the Credit Card Act relates to interest rates, which only benefit revolvers. Those that pay off their credit card balances every month would receive no benefit from these interest rate provisions. Eliminating universal default, double-cycle billing, and retroactive interest rate hikes benefit, at least initially, those with a balance on their cards. Because so many consumers carry a credit card balance from month to month, these provisions’ potential benefits may help a lot of consumers.
But the benefits are not crystal clear. During the debate over the credit card legislation, card issuers have warned of two major consequences if their ability to raise interest rates is curtailed. First, the ability to get credit in the first place would be further restricted. And second, the initial interest rates many cardholders pay would go higher.
But there is a third likely issue as well. Limiting a card issuer’s ability to respond to risk, the bill likely will curtail a variety of benefits currently offered by many card issuers. Although the credit card reform has not yet passed, card benefits have already been curtailed. Here are a few examples:
- American Express Blue Cash, for example, has reduced the benefits of its cash reward credit card.
- Discover Card has reduced to 6 months or even eliminated for some cards its balance transfer and no interest on purchase teaser rates.
- Low interest credit cards, those with interest rates around 10% or lower, are becoming harder and harder to find. Some cards, like the Citi Forward card, are starting with higher interest rates, and then lowering the rate as cardholders stay under their credit limit and pay on time. This reward for good behavior approach to credit cards could become commonplace as card issuers look for new ways to price in risk.
There are positive provisions in the bill, to be sure. Credit card statements will be clearer and more timely. Late payment penalties and over-the-limit fees will be curtailed. But the fundamental problem consumers have with credit cards will stay the same. For those “revolvers” among us, credit cards will be as expensive as ever. In that regard, the statute is in large measure a feel-good law, full of sound and fury, signifying nothing.
Here are some other reactions to the soon to be new law:
- Senate Passes Credit Card Bill
- Changes to the Credit Card Industry
- What the new credit card law means for you