Michael Catalin Vlaicu's  Instablog

The following article was written and contributed by a highly regarded investor and member within the StocksHaven Investments community, Jeff Lawson:

With the recent passage and signing of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the Credit CARD Act), some changes will be coming to a credit card near you in the not-too-distant future.

Among major provisions of the act are restrictions on the issuance of credit cards to persons under the age of 21 — young credit card applicants must now have an adult co-signer or provide proof of sufficient income — and a requirement that the interest rate on a newly issued credit card remain unchanged for at least 12 months.

Set to go into effect in February 2010, the Credit CARD Act also institutes a number of regulations intended to bring about some measure of credit debt relief to the nation’s indebted and cash-strapped cardholders. Under the new legislation, credit card issuers must provide 45 days’ notice before raising the interest rate on a credit card, and they’re prohibited from applying retroactive “punitive” interest rates on credit card accounts until an account is at least 60 days past due. Card issuers will also be required to reduce a punitive interest rate to its previous non-punitive level once a cardholder has made on-time payments for six months.

Already facing potential losses of over $70 billion from record-breaking numbers of cardholder defaults, the credit card industry has been attempting to recoup at least some of its losses through higher interest rates and penalty fees.

Consumers, struck by rising unemployment and the still-lagging economy, have been defaulting on their credit card debt at never-before-seen levels. Card issuers have seen their charge-off rates soar as they write off more and more outstanding credit card debt — full charge-offs for the growing number of consumers who are declaring bankruptcy and those who simply stop making payments altogether, along with partial charge-offs for debt-laden cardholders who are increasingly turning to debt relief programs like credit card debt settlement and debt consolidation that aim to secure creditor write-offs for a portion of a customer’s debt.

Credit card companies maintain that the new legislation will prevent them from assessing interest rates according to the relative risk a cardholder poses and will force them into across-the-board retrenchments that will negatively affect responsible cardholders who pay their credit card bills on time and in full each month.

Card issuers say that the new regulations will force them to charge annual fees for credit cards, shorten or eliminate purchase grace periods, raise standard interest rates and fees, and limit the issuance of new credit cards to consumers with superior credit ratings — those consumers who are least likely to need the additional credit. Already, some of the largest credit card companies have begun raising fees for standard services like balance transfers and eliminating fixed-rate credit cards — typically issued only to applicants with excellent credit — to be replaced with variable interest rates.

Some industry analysts say that card issuers will be forced to reduce credit limits on existing accounts and offer lower credit limits to new cardholders. Stung by the rise in defaults that reared its head months ago, credit card companies had already begun to cut credit limits in order to reduce their risk exposure, and analysts say the new rules will force banks to make even more cuts.

Reduction of consumer credit limits and tightening of credit could bring even a weak economic recovery to a standstill. Studies show that consumers who make purchases with credit cards spend almost twice as much as when they pay with cash. Restricted credit limits, combined with the persistent generalized consumer unease about overspending in the current recession, could force many cardholders back into making cash-only purchases and reduce overall consumer demand for goods.

Analysts predict that as much as 10 percent of outstanding consumer debt will “disappear” once it is paid off. Banks will reduce or eliminate credit accounts, and some banks may choose not to issue credit cards at all. Experts also warn that the poorest consumers, those who are most in need of debt relief and a way to pay for basic necessities like food and gas, will be forced into non-credit predatory lending schemes when they can’t get the credit they need.

Author Bio

Jeff Lawson  is a freelance writer that has been free lancing for over 7 years. He enjoys surfing the Internet for new blogs and is an avid reader. He primarily writes with regards to anything ranging from business to technology.

Disclosure: No Positions