Credit Card Regulation Could Shift Consumer Attitudes

Credit card companies will have to come up with creative ways to recoup some of the estimated $20 to 50 billion in revenue they are expected to lose as a result of the Credit Card Accountability Responsibility and Disclosure Act of 2009, and some tactics may be enough to cause a consumer revolt. A Wall Street Journal story described offers sent out by South Dakota-based First Premier Bank which disclosed an interest rate of 79.9%. The disclosure of outrageous interest rates could help bring about a shift in consumer's "buy now, pay later" approach to personal finance that has fueled the economy for decades. See the following article from The Mess That Greenspan Made for more on this.

Not knowing or caring what my credit card interest rates or terms have been for many years now, having paid the accumulated balance in full on a monthly basis save for one instance when an honest mistake delayed payment and both the interest charge and late fee were reversed after a pleasant phone call to the number on the back of the card (is that even possible these days?), I can only imagine what others will be going through in the new year.

Apparently, banks are now racing to levy new fees and hike interest rates where they can in order to make up for revenue that will soon be lost when the new credit card law goes into effect next month.

Reports indicate that somewhere between about $20 billion and $50 billion in lost banking revenue will soon have to be replaced as a result of the Credit Card Accountability Responsibility and Disclosure Act of 2009 and, unfortunately for the American consumer, when it comes to fees, banks can be very creative - annual fees, processing fees, statement fees, and all sorts of other fees that they probably haven't even dreamed up yet.

Probably the most outrageous example of the impact that the new bill has had on charge card terms comes via this WSJ story that you have to read a couple of times before realizing that there are no typographical errors involved.

Clearly, we are now entering a new world of even more bizarre (and mostly larger) numbers when it comes to credit cards, all of which will serve to heighten the general dissatisfaction that U.S. consumers have with banks, if not with their elected officials.

Mandatory Usury in One Lesson
How Congress dictated a 79.9% interest rate.

'You might have less-than-perfect credit and we're OK with that," read an October credit-card solicitation from South Dakota-based First Premier Bank. The interest rate, however, will strike some as usurious: 79.9%. That's a more than eightfold increase from the 9.9% the bank previously collected for a similar card.

Wait, wasn't Congress supposed to have passed legislation against predatory lending? As a matter of fact, yes. The whopping rate increase is First Premier's way of complying with the Credit Card Accountability, Responsibility and Disclosure Act of 2009. Among other provisions, that law prohibits fees of more than 25% above a card's credit limit. First Premier has been offering an account with a $250 limit and annual fees of $256. By law the latter figure must come down to $75. To compensate for the lost $181 in fees, the bank is raising the rate by 70% of $250, or $175, a year.

Already, there is talk of Credit Card Tea Parties that will likely add more unpleasant political overtones to what is already a contentious debate about the role of big banks in the U.S. during an election year.

But, more than anything else, this will probably only accelerate the pace at which Americans in general shun the "buy now, pay later" approach to their finances that has helped sustain the national economy for decades.

Of course, Washington D.C.'s "buy now, pay never" approach may someday come under attack, but probably not for a little while.

The manner in which banks make up these lost billions in fees may give "the new frugality" a shot in the arm this year. If nothing else, it will surely be entertaining to see how creative banks can be when it comes to replacing lost credit card revenue.

This article has been republished from Tim Iacono's blog, The Mess That Greenspan Made.