Credit card issuers are about as popular as root canals. No one loves those hideous fees that pop up when a flat tire makes you a nanosecond late in posting your bill. Or those surprise rate hikes that swoop in out of nowhere.
But Americans rejoicing that pernicious credit card companies have finally been brought to heel may be scratching their heads over this month’s bills. Despite implementation of “reform” legislation intending to protect consumers, credit card charges have gone through the roof, even as interest rates in general are at all-time lows. The Wall Street Journal recently reported that in the second quarter, interest rates on credit card debt reached 14.7 percent, compared to 13.1 percent the year before. More egregious, the difference between the prime rate and the cost to consumers amounted to 11.45 percentage points in the second quarter, the most in 22 years.
In trying to stamp out what President Obama calls “deceptive and unfair tactics” in the credit card industry, Congress and the administration delivered a blow to consumers who successfully manage their credit card debt, and to small businesses that rely on credit cards to provide essential cash flow. The final mandates of the Credit Card Accountability Responsibility and Disclosure Act of 2009 are now in place. The bill, known as the CARD Act, prohibits credit card companies from raising rates on existing cards without warning and limits penalties the companies can impose on those who fall behind in their payments. In the past, such adjustments were often triggered by a drop in a cardholder’s credit worthiness.
To jump ahead of the new regulations, and to offset defaults sustained during the recession, many companies simply pushed rates higher on existing cards before the new law took effect. Moreover, to circumvent rules prohibiting arbitrary hikes on existing accounts, card companies are simply issuing new cards at higher rates to begin with. According to a Synovate Mail Monitor study cited on the website LowCards.com, credit card companies sent out 83 percent more new card solicitations in the second quarter than a year earlier. While aggressively signing up new customers, issuers appear to be targeting “those with good or excellent credit scores,” says Bill Hardekopf, CEO of the LowCards website. Barred from imposing greater fees and penalties, issuers are reducing credit lines at the first whiff of trouble.
The bottom line is higher costs to creditworthy customers who borrow on their cards and less available credit for small businesses struggling to find financing. The Kauffman Foundation, which studies issues related to entrepreneurship, has reported that nearly half of all small businesses use personal credit cards to finance their companies. The Wall Street Journal cites data from Equifax, the credit report bureau, that the credit limit on new bank cards averaged $3,023 in May, down 11 percent from an average of $4,422 a year earlier.
There are, to be sure, some welcome reforms in the CARD Act. Customers have longer to pay their bills, and they receive advance notice of rate changes – helpful for those who actually read those fine-print indecipherable messages from their lenders. But meddling with the gigantic credit apparatus that backstops consumer spending when the economy is especially fragile may have been yet another foolhardy intrusion into the private sector. “Reforms” from this government may soon be regarded as about as appetizing as tainted fish, and just about as healthy, too.
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