If you've been reading this blog for any period of time, you probably know that I'm not a huge fan of credit cards. As a Dave Ramsey fan and facilitator for his Financial Peace University class, you'd probably understand why. In general I think that using debt and credit are just poor ways to get ahead.
I've also talked about how Credit Card companies often do things that are unethical, and how they won't look out for your best interests. Sometimes they'll even do things that are downright illegal! Needless to say, in many respects the credit card industry is in need of some increased regulation. It looks like that may be happening.
Credit Card Accountability, Responsibility and Disclosure Act (CARD) of 2009
On May 22nd, 2009 Barack Obama signed new legislation into law called the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (Credit CARD Act). The bill looks to put some limits on what the credit card companies can do in regards to charging fees, upping interest rates,and in theory forces them to be more transparent with customers. Many believe it will significantly change the face of the credit card industry. Some of the major provisions include:
- Requires credit card companies to give cardholders 45 days advance notice of an increase in interest rates.
- Prohibits credit card companies from increasing interest rates retroactively on existing balances unless the cardholder is more than 60 days late in making a payment. If the cardholder pays on time for the following six months, the company will have to restore the original rate.
- Prohibits credit card companies from marketing and issuing cards to borrowers under the age of 21.
- Requires balances with higher interest rates to be paid first, instead of lower interest first as many companies do now.
- Permits consumers to set credit limits lower than the limit offered by the credit card company.
- Requires that statements be mailed out at least 21 days before payment is due.
Most of the provisions in the bill will not take effect for another 9 months (February 2010), others slightly longer.
The full language of the bill is available to view here: CARD Act
A Good Idea Or Not? Could There Be Unintended Consequences?
Not everyone is hot on the idea of this credit card legislation saying that it could hurt the industry, and have the unintended consequence of hurting those it is trying to help. From the Washington Times:
“When you start restricting the price banks can charge to customers, they are going to start cutting back their lending,” said Erik Benrud, finance professor at Drexel University in Philadelphia.
“If the banks know they can't raise rates on existing balances, that too will restrict their desire to make loans to certain groups,” he said.
In essence he's saying that the people who might be helped by the provisions in the bill would actually be harmed because they wouldn't be able to get credit in the first place, or as another person mentioned, the cost of higher risk borrowers would be transferred to responsible borrowers through higher interest rates and fees for everyone. It could also mean fewer rewards programs.
Consumer advocates disagree that the bill will hurt as some industry experts have mentioned.
“You mean, if they can't rip us off they are going to give us less credit?” said Gail Hillebrand, financial services campaign manager at Consumers Union. “We've been hearing that argument for a long time.
“I don't think they're going to give us less credit, but if they can't rip us off, that's a good thing,” she said.
Others went on to say that the argument that all borrowers will pay higher interest rates is a moot point – as many responsible borrowers are already seeing rate increases or added fees for no reason other than the companies are trying to make up for losses in other areas.
Personally I can see the law having some unintended consequences, and I fully expect that the credit card companies could in fact restrict access to credit, raise interest rates for all borrowers and cut rewards programs significantly. We shall see if that actually happens.
The credit card legislation really isn't a big issue for me as i don't use credit very often, and when I do it gets paid off right away (with cash I already have saved). For borrowers that are responsible and pay off balances quickly, the provisions in this bill will probably have limited effect.
For those that carry a balance from month to month this bill will most likely give some added stability and transparency to their credit card relationships, and keep the companies from completely taking advantage of them.
Personally the only reservations I have about this legislation is that once again it means the government is getting way too involved in another industry, and they're on their way to controlling pretty much every aspect of our financial lives. I'd much prefer the free markets take their course, and that the government instead stress personal financial responsibility for average Americans, and help to make credit card use a thing of the past! (yeah right)
What do you think of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD)? do you think it's a good idea? Do you think it will have unintended consequences? Let us know what you think in the comments!