Credit Card Act of 2009: Thanks for Nothing, Congress

Congress Takes Bow For Credit Card Act of 2009

The Credit Card Act of 2009 was intended to curb certain practices of the credit card industry that were deemed abusive to consumers. With a great deal of public fanfare, Congress passed legislation that provided the following benefits to credit card holders:

• Credit card bills would be mailed at least 21 days before the payment due date
• Customers would be given a 45 day advance notice of contract changes
• An increase of the interest rate could be rejected by consumers who would then be required to cancel their card and pay off any existing balance within 5 years, possibly with a much higher minimum monthly payment
• Payments would have to be applied to that portion of debt with the highest interest rate
• Interest rates could not be raised on existing balances unless the borrower was more than 60 days delinquent
• Prohibited “universal default” provisions and double cycle billing
• Better disclosure of fees, card rules and interest costs

Senator Dodd of Connecticut, Chairman of the Senate Banking Committee, stated that “The new rules of the road established by the Credit Card Act will shield credit cardholders from widespread abusive practices”. Whether or not the Senator (who faced an ethics probe relating to the special low rate mortgage he received from Countrywide) actually succeeded in providing any real benefits to credit card holders remains questionable.

Credit Card Industry Response To Credit Card “Protection” Act

The credit card industry is not based on philanthropy - they seek profits and have been exceptionally proficient in doing so historically. Faced with huge losses from defaulting customers and the prospect of legislated profit limitations, the credit card industry reacted to these threats with the following changes:

• Reduced or eliminated fixed rate credit cards; when interest rates increase, card rates will increase commensurately
• Instituted annual fees, higher balance transfer fees, international transaction fees, higher cash advance fees, reduced award programs, slashed credit limits, canceled over $500 billion dollars in credit lines, summarily closed accounts deemed risky, raised monthly minimum payments and imposed strict standards for new credit cards
• Increased interest rates by as much as 10 percentage points or more across the board, regardless of credit or payment history. Unable to adequately assess risk or price accordingly, every credit card holder was assumed to be a potential default and charged accordingly - See Capital One Can’t Identify Their Low Risk Customers

I have heard countless cases of people telling me that their card rates have been raised to 20% to 28% for purchases and cash advances. Personally speaking, virtually every credit card I have has had the interest rate increased substantially, with Capital One (COF) taking first prize by going from 8% to 17.9% on purchase balances.

Ironically, my General Motors credit card has actually dropped the interest rate from 14.15% in 2006 to a “low” 9.9% currently. I assume that the low rate from General Motors has something to do with the fact that GM has an unlimited credit line with the US Treasury and does not have to worry about silly things like making a profit.

Why The Credit Card Companies Are The Biggest Winners Under The Credit Card Act Of 2009

What was supposed to be a major consumer protection act has turned into a future profit bonanza for the credit card companies. Many credit card customers may go under financially but the credit card companies will do just fine, judging by the price performance of their shares and their actions taken cited above. The credit card industry has adjusted their business model to the new reality and will prosper.

While the S&P 500 has increased by 52% since March of this year, the stocks of credit card companies have performed dramatically better. Since March 2009, the stocks of companies such as American Express (AXP) and Capital One have tripled in value even as write-offs of credit card debt hover in the 10% range and new restrictions on credit card companies become law.

“I Am From The Government And I Am Here To Help”

After bailing out the banking industry, our government (perhaps inadvertently) managed to provide even more help to the credit card industry. Thanks for trying to help, Congress - I feel much better now that I am paying 18% instead of 8%.

COF

AXP

Disclosures: None

Comments

[kmi:]

I am ok with all of it simply because there were many people who really should not have had credit cards in the first place. Also credit card companies gave high credit lines to people least able to pay down their debt (those carrying high monthly balances), again I find changes encouraging.

If anything by pumping fees on fees they punish themselves as fewer people will be inclined to use their cards. Generally speaking I suspect this is part of the general consumer devereaging everyone keeps talking about and also part of the "increase in savings rate" as people save-to-buy instead of buy-with-credit.

Frankly, I suspect the people most inclined to take advantage of all the things credit card companies are increasing fees on are the people with the lowest fiscal capacity. I am a big fan of the changes.

If you have good credit and aren't a credit risk you should be able to avoid all the increased fees and poor terms by shopping around. Which is as it should be.

Aug 26 09:48 AM

[Tony Petroski:]

"Senator Dodd of Connecticut, Chairman of the Senate Banking Committee, stated that “The new rules of the road established by the Credit Card Act will shield credit cardholders from widespread abusive practices”. Whether or not the Senator (who faced an ethics probe relating to the special low rate mortgage he received from Countrywide) actually succeeded in providing any real benefits to credit card holders remains questionable."

I think the "benefits" outlined in the article make sense, but can't a free people work these things out for themselves without the help of Senator Dodd?

Aug 26 10:01 AM

[Northstar10000:]

Dodd is a goof. Credit Card Companies got what they wanted out of this as sure as the sun rises the idiot public bought the government line. Public will get it when hell freezes over which is coming soon by the way. Government is a complete total joke and a fraud.
I'm short the stock market, I consider it a free gift from the public and government fools.

Aug 26 07:20 PM

[martyg:]

credit card companies should all go out of business as they are just drug dealers in disguise.

knowing that this will not happen, any company that accepts a credit card should be forced to accept a debit card also. this is directed to auto rental companies as they make their own rules. i don't want a credit card. a debit card is like paying with cash and allows internet bill paying. it will help the economy and kill profligate spending.

Aug 27 03:59 PM

[User 479601:]

What the Credit Card Act did was stop credit card companies from charging higher rates to people who became more risky over time. It forces companies to pay off higher rate balances before lower rate balances (imagine going into MACY*S and demanding their buy one get one free sale entitles you to a free diamond ring with purchase of T-Shirt). So since higher risk customers can't be charged more, all customers are charged more even if they have perfect credit. Congress taking care of "those who can't take care of themselves" at the expense of the responsible

Aug 31 12:39 AM

[Andregide:]

Isn't it funny that every time the government decides to "play businessman" they lose their shirt, they borrow money from anyone stupid enough to buy their "bonded indebtedness", they blame the people who they regulated, and the people of America have to pay the bill.

Pop Quiz: In general, do government bureaucrats create new wealth by producing a saleable product or service that people would voluntarily choose to buy at the full cost of production?

Ah, you say, but what is the "full cost of production" of the things that the government says they will provide. Uh huh, that's the real question, isn't it? Automobile bailouts? Financed. Economic stimulus? Borrowed. Medicare? Done on credit. Social Security? A Ponze Scheme.

I love Americans, especially the liberals, their minds have never left the 6th grade. Their thoughts are of the Disneyland utopia where everyone is a Polyanna and generosity flows through everyone's veins. Nothing that they decide is good and righteous is unaffordable, the rich people of the world have unlimited resources, and poor people are victims of their betters and never poor because of their own choices.

As Barry Goldwater might have said, the liberals are the antithesis of America. Like dependent children who need their parents to shoulder the responsibility for their lives, they do not consent to be governed, they elect to be ruled. They graduated college and replaced the concept of "Mommy & Daddy" with "government". And just like they returned from college every vacation with three trash bags full of dirty clothes for their mother to launder, they expect the government to wash their dirty credit card laundry, too.

I'm sorry, you are an adult, now. If you mess up your credit, overextend your budget, and try to live like a king while making median income wages, you are going to suffer. No mommy, no daddy, no government can stop that from happening.

Sep 01 11:13 AM