The new law passed by Congress regarding credit cards will have a large impact on the companies involved, although it seems there has been barely a word of opposition or protest from the industry. It may also mean less credit overall, which will not help any nascent economic expansion. The law was passed by a strong majority in both houses and after being signed by President Obama, will go into effect in February 2010. The law includes restrictions on double cycle billing and sudden escalation of rates on outstanding balances. Disclosure affecting consumers would be improved as well.
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Despite the impact that this legislation will have on the companies involved, there hasn't been much of a lobbying effort against it. Is this because the companies saw so much support for it, that they considered it inevitable? Or is there something else at work? (Read our related article, Should You Close Your Credit Card?)
Credit Card Crunch
It's possible that these companies, most of which are public, are being stifled because they received taxpayer money from the Capital Purchase Program (CPP), which was part of the Troubled Asset Relief Plan (TARP) passed in the fall of 2008. Most may be trying avoid the political heat they would receive from opposing these rules which are designed to benefit consumers. American Express (NYSE:AXP) is one of the few to make a public statement on the changes. CEO Kenneth Chenault said that the changes would mean less credit availability for consumers, and would be more negative than positive for his company.
Advanta Corp (Nasdaq:ADVNA) took the drastic step of cutting off additional credit to its one million card holders beginning in June 2009. Advanta is a niche card company that specializes in small business credit. Although some pundits could interpret this change as a reaction to the new rules, the company is having its own problems with funding its balance sheet and high default rates on its cards, and may have taken this step anyway. (Read more at Understanding Credit Card Interest.)
Impacts on Profit
The profitability of credit cards has not been that great recently for the industry. Many banks are large players in the credit card market, and they all reported high delinquency rates due to the recession. Wells Fargo (NYSE:WFC) reported a 10.03% default rate, and Bank of America (NYSE:BAC) was slightly higher at 10.47%. Citigroup (NYSE:C) said its annualized charge-off rate in April was 10.21%. The unanswered question is how these changes will impact the economy and whether the result will be a significant decline in credit availability to the American consumer, as those who oppose the law claim.
The Bottom Line
The economy is weak already, and less credit will not help with an expansion. This is particularly true for the U.S. economy, which has a dependence on consumer spending for growth. The new law will change how a strangely silent credit card industry conducts its business, and may stall an improving economy if the worst fears of those who opposed the bill are realized. (For more, see our related article Investing In Credit Card Companies.)