Credit Card Industry Reform

The legislation imposing stricter rules on the credit card industry was signed by President Barack Obama on Friday. The new law will take effect in February 2010. The laws are intended to protect consumers against “any-time for any-reason” changes. Here’s a brief look at the key pros and cons associated with the new legislation.

For years, credit consumers have been waiting for a law that would protect their rights. According to the Credit Cardholders’ Bill of Rights Act of 2009, card issuers will not be able to use certain practices, like double-cycle billing, universal default and others. And even though the new law does have good points, the analysts still argue about its pros and cons.

The main question on the consumers’ lips is, whether the interest rates will go up? Actually, that was the key argument of credit card reform critics. Once the new law restricts lenders to adjust interest rates on the existing balances, the issuers will have to make up the lost revenue somewhere. And the chances are banks and companies will impose annual fees and higher interest rates on the accounts of the majority of customers. In addition to that, companies may slim down various lucrative rewards programs. Meantime, experts believe that lenders will reserve the best credit card applications for the best customers.

The next question is, whether the credit card reform will make it difficult for people to get access to credit? Actually, it’s already tough to get access to credit, but there’s no reason to blame the reform for that. The point is that companies and banks have become more conservative about the choice of their potential customers. Because of the challenging economic situation, leading credit companies have greatly slashed the amount of credit card mail offers. All the more so, the companies are highly concerned about the financial responsibility of their current customers.

While more and more customers are losing their jobs, companies are seeing ever-increasing default rates. So, it’s no surprise why lenders increasingly slash credit limits on the accounts of their customers. Many analysts acknowledge the fact that credit limit cuts are not that bad for the economy. In the past few years, banks provided big spending lines to those borrowers who didn’t need them. And now card issuers can reduce their exposure to big risks associated with credit defaults by cutting spending limits on the accounts of their customers.

All in all, there’s plenty of time until next February, so banks and credit card companies will compensate their losses by using all those banned practices and tactics before the new law kicks in. However, it’s worth saying that although companies raise interest rates, they still allow their holders to freeze old interest rates but, in that case, customers will not be able to use their cards anymore.

If you’ve been hit by high interest rates, act promptly – get in contact with your issuer and try to negotiate the issue by phone. In case the company doesn’t meet you halfway, you can opt out of new interest rates, but you should do this in writing. And, finally, be sure to check your monthly statements for any changes.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.