Possible Negative Consequences for Card Holders

Chris Merida
Director, Congressional & Public Affairs
U.S. Chamber of Commerce

Last May, the president signed into law the Credit Card Responsibility and Disclosure Act, which requires fundamental changes to the lending industry’s card-related practices.

The sweeping new law affects interest rates, fees, and disclosure requirements for all personal credit card contracts. The law prevents rate increases in the first year after a card is issued (and at the same time requires promotional rates to last at least six months), prohibits double-cycle billing, and precludes over-the-limit fees in most cases. The law also requires 45-days’ notice of any increases in fees, interest rates, or finance charges, and credit card bills must be mailed to the customer at least three weeks before payment is due.

The purported aim of this legislation is to ensure greater transparency and customer awareness regarding credit card contracts. Many of the limitations and requirements may seem reasonable at first blush. However, in practice, there are some undesirable consequences for both consumers and businesses of all sizes.

Credit cards are risky loans—they’re unsecured, open-ended lines of credit that offer their holders a great deal of flexibility to use, and pay back, when they want. Lenders understand the associated risk and price accordingly. If lenders are limited in how they manage risk, they will address it in other ways.

As a result, here are a few ways that customers can expect to be impacted by the new rules:

• Higher interest rates/lower credit limits. Because credit card companies are no longer able to price based on the risk of specific customers, interest rates will likely increase and credit limits will be lowered for all customers, even those with good credit histories.
• Annual fees more common, perks more limited. Annual fees for cards will likely become more common, and rewards programs such as cash back, airline points, and similar programs will be limited.
• Limited customer flexibility. Lower credit limits for some customers mean that they will not have the option to use a credit card to make large purchases or to pay for unexpected medical costs.

Though the law does not apply to business credit cards, business owners whose customers rely on credit cards will be affected. Moreover, Congress could seek to apply the same rules to business cards, which would mean higher rates; fewer, lower rewards; and fewer choices in the marketplace for businesses struggling to recover from the recession.