By Nancy Trejos
Washington Post Staff Writer
Wednesday, May 20, 2009
Landmark credit card legislation, poised to reach President Obama's desk by Memorial Day, will force the card industry to reinvent itself and consumers to rethink the way they use plastic.
The Senate cleared a hurdle yesterday, voting 90 to 5 to pass a bill that would sharply curtail credit card issuers' ability to raise interest rates and charge fees. Lawmakers will now turn to reconciling differences with a similar bill approved by the House last month. Swift passage was expected given that the Senate version received so much bipartisan support and that the White House has pressed for action.
When Obama signs the bill into law as expected, the $960 billion credit card industry will go through a restructuring that could have broad implications for consumers.
The bill prohibits card companies from raising interest rates on existing balances unless a borrower is at least 60 days late. If the cardholder pays on time for the following six months, the company would have to restore the original rate. On cards with more than one interest rate, issuers will have to apply payments first to the debts with the highest rates, which would help borrowers pay off their cards more quickly.
Treasury Secretary Timothy F. Geithner said the bill "will help create a more fair, transparent and simple consumer credit market."
Card executives said the changes will force them to charge higher rates and annual fees to delinquent customers and those in good standing.
"This bill fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk," said Edward L. Yingling, the chief executive of the American Bankers Association. He said that lending would become more risky and that, "It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate."
Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, an industry group, said available credit could be reduced by as much as $2 billion. Those with the weakest credit histories would be hardest hit.
When credit cards were introduced about 50 years ago, issuers practiced a one-size-fits-all approach of charging an annual fee and roughly the same interest rate of about 18 percent to everyone. As the industry became more deregulated in the 1980s, around the time that credit scores were introduced, issuers were able to separate the risky from the not-so-risky borrower and tailor the terms of card contracts.
The money they made from customers who did not pay their bills in full each month became an important revenue source. The industry makes $15 billion annually from penalty fees, and one-fifth of consumers carrying credit card debt pay an interest rate above 20 percent, according to figures cited by the White House and compiled from the Government Accountability Office and the Federal Reserve.
To make up for the lost revenue, card issuers will turn to those customers who pay what they owe in full and on time every month, analysts said. Gone will be the days when creditworthy customers enjoyed the benefits of low interest rates and cards that offer rewards such as frequent flier miles and cash back, they said. Annual fees, which had been banished to cards with rewards programs, are likely to return. Offers for zero percent balance transfers are likely to become more rare.
"This industry will start looking more like a one-size-fits-all pricing approach which dominated in the '80s -- 18 percent interest and $20 annual fees," said David Robertson, publisher of the Nilson Report, which covers the industry. Customers who pay in full each month will have "to start picking up the slack, to start pulling their weight."
Consumer advocates and legislators pointed out that the legislation still allows issuers to raise interest rates for future purchases as long as they give 45 days' notice. It also does not set any interest rate caps, allowing issuers to charge new customers any rate they want.
"This ominous we're-going-back-in-time threat doesn't make a whole lot of sense," said Travis B. Plunkett, legislative affairs director at the Consumer Federation of America.
Bruised by a rise in delinquencies and a record percentage of debts they have had to write off, some of the biggest players in the card industry, including Bank of America, Capital One and Chase, have already been increasing interest rates and cutting credit limits even on customers who pay on time.
Credit card issuers have come under fire for such any-time, for-any-reason interest rate increases at a time when consumers are buckling under the weight of debt. Outraged consumers have complained of mistreatment from the same companies that have been receiving federal bailout money.
The Senate bill, written by Banking Committee Chairman Christopher J. Dodd (D-Conn.), would also restrict the ability of college students to get credit cards and require card companies to make contracts easier to understand and available online.
The House bill, authored by Rep. Carolyn B. Maloney (D-N.Y.), largely mirrors regulations passed by the Federal Reserve in December that would ban many so-called unfair and deceptive practices. Both the House and the Fed's efforts are considered weaker than the Senate bill. Analysts and industry insiders said the fact that the Senate bill received so many votes is a good indication that it will make it to Obama.
The Federal Reserve's new rules do not go into effect until July 2010. The House and Senate bills seek to accelerate that timeline. The Senate bill would be enacted nine months after signing and the House bill 12 months after.