President Barack Obama Friday signed a bill overhauling credit card rules, banning issuers from suddenly raising interest rates and charging hidden fees. The new laws mostly protect riskier borrowers - those paying off massive monthly balances at interest rates up to 30 percent. But banks warned that credit access to all consumers will be limited.
Among other things, the act safeguards against:
- Interest rate increases: Generally bars card issuers from raising rates, unless consumers are more than 60 days in arrears;
- Penalty fees: Bars imposition of fees for exceeding a card's limit, under most conditions;
- Marketing to college students: Bars card issuers from extending credit cards to people under 21 years, without verifying their ability to pay or getting their parents' permission.
The bill also requires a card's terms and conditions be written in plain English as well as posted on the card issuer's website. The new law takes effect in February 2010.
The White House said Americans pay some $15 billion annually in penalty fees, in part because of credit card contracts that are unfair and deceptively complicated. Interest rates for millions of cardholders have jumped in the past six months, making paying off balances more difficult.
One win for banks was that the new rules do not cap interest rates or fees. To make up for the lost income, however, some analysts predicted that issuers may charge more annual fees, reduce credit lines and slim down rewards programs. Younger consumers with short credit histories or small-business owners could face limited access to credit.
"At the end of the day, you are still talking about a loan, and lending is inherently a risky business," Peter Garuccio, spokesman for the American Bankers Association, told the Associated Press. "What the new laws do is limit the ability of card issuers to price for risk."
But consumer advocates and other observers said credit card companies will continue to profit under the new rules, from fees charged to both consumers and merchants. They also believe credit and incentives will be there for good customers.
"There will be competition among banks for good customers," Pamela Banks, senior counsel for the Consumers Union, told the Associated Press. If one bank charges an annual fee, "there will probably be another bank out there" that won't, she said. Otherwise, people will start using debit cards or paying cash.
The legislation "is not going to be a hanging for banks, but I think Congress has collared them and are bringing them in," Robert McKinley, founder of CardTrak.com, which consults with banks, told USA Today. "It's been the Wild West for the card industry for a long time."
Discussion Questions: How will the credit card reform bill impact consumers? What should retailers be doing in response?