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The Impact of Credit Card Reform Legislation
Credit Card Reform Legislation
In May 2009 the Credit Card Reform Act was passed by congress in order to curb unfair business practices of credit card companies and to further give the card holder more protection. This act will not go into effect until February 2010, a full 9 months for the Credit Card companies to prepare. The question remains will the consumer really benefit from this Act or is someone just blowing smoke up our butts? I guess in order to answer that we should look at how things are today, what the reform will do, and what the Credit Card Companies are doing in light of this reform.
How Things Are Today
Today, or rather, up to a year ago credit card companies offered a introductory 0% interest rate. After the initial introductory the interest rates could remain low. If you went over your limit you are assessed an over the limit fee. If you were late on your payment you were assessed a late fee and they would move your interest rate higher.
In fact if you are late on just one card all the other cards you have would most likely see a rate increase, some as high as 30%. When you make your payment, the credit card companies puts it toward the balance with the lowest rate, thus the higher rate is still effective. They are also able to lower your limits whenever they want. Basically, they can do anything they want.
What The Reform Will Do
The new legislation limits their abilities to change interest rate within the first year. In fact it will limit their ability change their rates at will, which is done presently. They will need to review all accounts every 6 months and if payments are on time, older lower interest rates are to be reinstated. The card holder must be given 45 days notice before the interest rate can be increased. Higher rate balances are to be paid first and they must tell you how long it will take to pay off your debt. Over the limit fees can only be charged if the customer agrees to allow the issuer to continue with the transaction. Of course there are more things, but these I feel are the ones that affect most people.
What Will The Credit Card Companies Do
Remember the Credit Card Companies had 9 months to prepare for the changes, how have they reacted? Many of the companies have begun to raise the rates while they are still able too. They are increasing minimum monthly payment amounts from 2% to 5% of the balance. They will begin charging inactivity fees and you should see the return of annual maintenance fees. Basically by eliminating one fee, it will birth a new fee, the difference now is the new fee can be assessed to everyone.
What We Should See And Know
What we need to remember is that the credit card companies makes money in two ways. One is from the vendor who must give a percentage of the sale to the card issuer, usually around 1%. The other is from the consumer whether it is from the interest or from fees. Their “worst customers” are the ones that pay off their balance every month, so they are only making money from one source. Instituting a inactivity fee or annual fee allows them to make money from these “bad customers”.
We will probably see “grace periods” go away. Grace periods is actually a misnomer to the credit card industry. With other bills such as your mortgage or car payment, the grace period is the time you can make your payment without it being considered late, usually 15 days. The credit card industry considers the end of your grace period being the due date on the statement. So this really does not change anything in the long run.
Getting 45 days notice on rate increases is nice because it allows you more time to decide if you will accept a rate increase. The problem here is that, although you can opt out, you must close your account in doing so. Closing your credit card can have a negative impact on your credit report, so this may be detrimental.
Overall, the credit card issuers will not lose money as they would like us to believe. They have devised new fees and conditions that stayed within the legislation. Higher rates before the legislation goes into effect, new fees, and higher minimum payments all guarantee the card issuer to make money. I foresee an increase in delinquencies and bankruptcies with the increase in the minimum payments, as consumers could have trouble making the higher payments.
In summary, I believe the intention of the legislation was to protect the consumer, I just don’t a lot of things changing. Old fees will be replaced with new fees. Interest rates will continue to be raised. Minimum payments will go up. In the end nothing has changed, the legislation looks good on paper, it should have been put into effect immediately in order to really protect the consumer. Waiting 9 months allowed the card issuers to put things in place that would protect their profit margin and income. I do believe that a company should make a fair profit. Big Bank CEO's make millions of dollars per year, tell me these bank are not making money. Yes I know they are not only in the credit card business, but do you honestly believe the credit card division is losing money, because if they are they pay they wouldn't get their bonus'. Do you think the credit companies will lose money with this legislation? These are my views and my views only, I would love to hear your comments on this subject, as well. Perhaps I am missing something, so please let me know.