The increasing number of defaults and the introduction of tougher legislation will have a tremendous impact on the credit card industry and consumers as well, says Laura Nishikawa, an industry analyst. She is a researcher for shareholder advisers RiskMetrics Group.
Nishikawa warns that the two factors would come into play and affect the entire credit card industry in ways never before seen. She says that with tighter government regulation, credit card companies will look for new ways to earn profit aside from increasing interest rates. Nishikawa also explains that because consumers are bound to borrow less, banks will in turn, lend less.
Meanwhile, industry experts say that the nation’s unemployment rate is closely tied to losses that credit car companies are considering as charge-offs. A newly released report from TowerGroup says that credit car charge-offs could increase 30% this year compared to 2008. This would translate to $71 billion.
Ben Woolsey, director of marketing and consumer research for CreditCards.com, says that the recent losses banks are currently experiencing will only worsen.
This would lead to a variety of changes for many cardholders. Consumers with less than perfect credit histories may see no access while cardholders with stronger profiles can see higher charges and fewer perks.
Woolsey says that the new legislation, set to go in place by February next year, will take away a significant portion of the credit companies’ revenue. He adds that consumers should expect companies to figure out other means to make profit. Consequently, companies may cut down on rewards and even introduce new annual fees and charges to make up for the loss income. The industry is also expected to see more promotional rates and teaser rates to attract potential cardholders.
Experts believe that many credit card issuers and banks will experiment with different combinations of interest rates and added fees for the first three to six months after the legislation goes into effect. Analysts predict that companies will most likely stick with additional fees and charges to make up for lost income and profit.