Credit CARD Act sets in, but for every action…

The Credit CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act) went into effect today. These new rules impose restrictions on lenders and are intended to promote transparency and protect consumers from being blindsided with changes in payment due dates, interest rates, etc.

Tthe changes are meant to put more information in the hands of consumers who often struggle to understand language written by lawyers in the fine print of their statements. Here are some changes that will surely be welcomed by consumers.

- Eliminating universal default. Pay one account late and the interest rate on your other accounts zooms up? Not any longer.

- Limiting interest rate hikes. For example, the APR you have on a new account can’t increase during the first year unless you have a “teaser rate,” the rate is tied to an index, or you’re more than 60 days late on a payment.

- No more pay to pay. You can’t be charged to pay your bill over the telephone, electronic transfer or any other method of getting your money in on time.

- Total payout disclosure. Clearly written on your statement will be how long it will take to pay the account if you only make the minimum required payments – and how much it will ultimately cost.

- 45 days notice of significant changes to terms. If your credit card company is going to hike your APR or fee charges, you now have plenty of notice. Even better: you can opt out of the increase by suspending the card and concentrating on repaying the balance.

Also, according to the WSJ,

“Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.”

While the changes appear to be positive, the flip side is that they are likely to elicit a backlash from banks in the form of drawing down on credit lines, higher interest rates and all sorts of fees. These regulations on credit card lenders are estimated to cost the industry $12 billion annually. While these rules may stem from a desire to protect consumers, they may result in a diminishing of credit lines at a time when millions of Americans are struggling and might have planned to tap into their lines of credit. As Newton’s law reminds us, for every action, there is an equal and opposite reaction, and this case is no exception to the rule. As the WSJ warns, “get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.”

So it turns out that these regulations may turn out to be less helpful for consumers than they appear on the surface. This is what the current administration and majority in Congress can’t seem to understand; overreaching in the private sphere via this kind of regulation is not a foolproof formula for helping consumers. Sure, lenders operate according to a profit motive, but people run their own budgets similarly. The government should focus on providing incentives for businesses to expand and hire if they’re worried about people’s ability to pay off their debt, not on strangling lenders. And with lenders already hard-hit by the economic crisis and customers defaulting on their debts, they will look to make up lost profits elsewhere or decrease lending, which is bad for lenders and consumers alike.

Back in May of 2009, I wrote that Congress should tread lightly on credit card reform for this very reason. Erecting obstacles to the extension of credit is no way to get yourself out of a credit crunch. Here we are in 2010, and the Obama administration still hasn’t gotten this message. And once again, consumers will be stuck footing the bill for  their mistakes in the form of new fees soon.

Tags: regulation