A year after Congress passed and the president signed the CARD Act, the Federal Reserve is moving to involve government even more deeply in credit card regulation.
The Federal Reserve in October unveiled plans to amend several credit card regulations and block some industry practices, targeting cards that charge high up-front fees. The changes would take effect October 2011.
But any government involvement is likely to drive up fees even more while further limiting the number of consumers who have access to this type of credit, according to Bill Hardekopf, CEO of Lowcards.com. His company tracks the credit card industry and provides consumers with information on more than 1,000 credit cards.
‘Will Increase the Costs’
“I’m not crazy about the government being involved in anything,” Hardekopf said. “I think that the free market runs things a lot more smoothly and efficiently than the government can. If the government gets involved, it will increase the costs and the fees.
“Every time you have more regulation, more people have to be involved, so everything costs more,” he explained. “Every time things cost more, the additional costs get passed on to the consumer.”
Credit card issuers set the stage for trouble several years ago by extending too much credit with fees that were to low for the risk that was assumed, Hardekopf said.
As a result, when the recession hit at the end of 2007 and millions of people starting losing their jobs, consumers that should have been granted less credit or no credit were the first to stop paying their credit card bills. They didn’t just fall behind, as many cardholders occasionally do. Those with the worst credit profiles stopped paying altogether.
Credit Ceilings Too High
The problems of easy credit soon extended to those who had traditionally been good credit risks as unemployment grew, Hardekopf said. Card issuers then realized they had increased borrowing ceilings to levels that were far too risky. Credit card balances rose to more than $700 million in October of 2008 and have been falling ever since as issuers have tightened their standards.
While trying to control risk, the card issuers have been looking to keep their income up by charging whatever fees they can, Hardekopf said. Balance transfer fees have gone up from 3 percent with a maximum of $50-$75, to 5 percent with no maximum.
Though they’re being more prudent about awarding credit, card issuers are soliciting customers again, Hardekopf said.
“This is an indication that the financial outlook for credit card issuers has improved dramatically. Defaults and delinquencies continue to decline, and they have put new policies in place, as well as some increased rates and fees,” he said. “They are once again aggressively pursuing new customers, but this time around they seem to really be focusing on those with good or excellent credit scores.”
Bankers Association Is Wary
The American Bankers Association represents financial institutions that issue most of the nation’s credit cards. The ABA has yet to take an official stance on the Federal Reserve’s plans but is wary about further government involvement in the industry.
“We’re still reviewing the Fed’s proposals and will be submitting a comment for review,” said ABA spokesman Peter E. Garuccio.
“As you know, the rules are pursuant to the broad consumer protections embodied in the CARD Act, which was designed to provide greater clarity and transparency for card customers, protect them from interest rate increases, streamline billing practices, and curb certain fees,” he continued. “The industry has moved aggressively to implement the new law as its various effective dates have arrived and will do so again as the effective date of this latest round of proposals comes on line.”
Garuccio added: “The industry will also work to ensure that any unintended negative consequences from this proposal are minimized. For example, we are concerned that the provision barring issuers from relying on ‘household income’ as evidence of a card applicant’s ability to pay could negatively impact the ability of stay-at-home spouses to get a credit card in their own name.”
Phil Britt ([email protected]) writes from South Holland, Illinois.