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Does the Credit Card Bill Change the Game for Consumers?

The credit card bill that we covered last week has passed in the Senate.

The bankers are still upset over the bill, but the 90-5 vote on the final version indicates that they decided not to put up a backs-to-the-wall fight. Given public animosity toward credit card issuers (or, more specifically, to the credit card divisions of the same banks they trust with their deposits), and the vocal intervention of a popular President Obama, I think the banks decided this was not a battle worth fighting. They would rather save their fire for a bigger issue that is less black-and-white for the public - say, whether Treasury should be able to take over bank holding companies, or whether there should be a central systemic risk regulator.

Ezra Klein points out that the bill may make credit cards more expensive for people who pay off their balances in full every month.

The credit card industry, in recent years, has developed something of a tiered model. Good customers are treated extremely well. There are rewards programs, favorable terms, and high limits. But those who don't prove as assiduous about their bills, or slip up amidst their payments, fall into a second tier that's as punishing and deceptive as the first tier is serene and straightforward. Hidden fees, unexpected rate increases, universal default, and all the rest. The result is that low income credit card holders effectively subsidize high income credit card holders. The financially illiterate are gamed so the financially literate can pay very low fees. Flattening that business model out a bit would make a lot of sense.

I'm with Klein in spirit. I pay off my balance in full every month, and as a result I make a lot of money off of my main credit card issuer (American Express) - I think I net something like 1.5% in cash back on all of my purchases. When I was in the business world and flying a lot, and charging all of my travel expenses on that one card, that came to over $1,000 per year. The trap, of course, is that if you miss a payment, you can forfeit your accumulated rebate (it only pays out once per year) and pay lots of fees. Clearly AmEx is paying me my rebate by gouging other customers with fees. If I lose my rebate because their ability to gouge other people is reduced, that's a good outcome in my opinion.

Unfortunately, I'm somewhat skeptical about the claim that credit card issuers will be unable to make money off of balance-carrying customers and will have to increase costs for zero-balance customers like me. I don't have any specific evidence here, but I know that this is a very sophisticated industry with many smart people who have sophisticated techniques for analyzing data sets with millions and millions of rows. If there is a way to make more money from customers, they will find it.

By James Kwak  |  May 19, 2009; 4:34 PM ET
Categories:  Banking  
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Next: Preventing the Next Crisis: The Case for Boring Banks

Comments

Not really. I have found using BBB is far more effective than Congress who, receives stipends from CC companies for running for office. Frank, Dodd, Durbin and Reid are all incompetent Dems. Rep. are worse.
Smoke and mirrors again folks!

Posted by: crrobin | May 19, 2009 5:21 PM | Report abuse

As usual, the industry is crying wolf. They clearly have a very profitable semi-monopoly on charges. Reducing some of the underhanded ways they make money may reduce profits, but it won't substantially change their business.

There are lots of companies that victimize their customers. Hanover Insurance routinely mails its statements days after the date on the statement, in hopes of getting a late fee. Many furniture companies make no money selling furniture, they make all their money on predatory financing. I'd hope the new rules are, or could be, extended to all similar lines of business.

Posted by: pilgrim1629 | May 19, 2009 6:02 PM | Report abuse

I pay my account off each month if they plan to charge me any kind of fee I will close all my accounts and no more buying over the internet it will be cash, check or Money order Don't punish the good folks that pay their bills and spend only what they can afford

Posted by: akeegan2 | May 19, 2009 7:35 PM | Report abuse

They already charge a fee to the seller as well as charge the seller for the equipment to access their networks. They collect those fees whether or not you pay your balance in full. Any idea what proportion of their income comes from interest, and what from selling fees?

Posted by: TheRaven2 | May 20, 2009 8:49 AM | Report abuse

The banks are once again blowing smoke at Congress and the public. They are not just raising interest rates for those who miss a payment or are late on a payment. They are raising them on those who always pay on time and they are doing it in anticipation of this new law. They cook up all kinds of reasons (i.e. "too much usage", "too many other credit cares", etc. etc.) but it boils down to a greedy money grab and its about time Congress put a stop to it. By pumping $20 million a year into Congressional Campaigns, the big credit card issuers managed to ram through the so-called Bankruptcy Abuse act in 2006 which allowed the banks free rein in issuing card and charging whatever interest they want but made bankruptcy nearly impossible for most people. I have always said that there are really only two dishonest occupations -- lawyers and bankers. Both pretend to be concerned with "helping people" but are really only interested in gouging as much money out of them as possible. At least you KNOW the used car salesman is out to get your money!!!

Posted by: mrdocuman | May 20, 2009 3:08 PM | Report abuse

This is just one more ruse on the part of the credit card companies. They just spent the last year gouging the American People with increasing interest rates and STILL took bailout money.

Now they are losing their rate-jacking scam and are whining they can't lend out money. We could all learn a lesson; start paying off your cards and NEVER borrow from credit card companies again.

Posted by: cmontalbano | May 20, 2009 3:12 PM | Report abuse

More is needed for true credit card reform. Interest rates from 20-24% have been reported.
Under other laws, members of the mob were sent to jail for loan-sharking because of loan fees this high.
A reasonable rate would be 3% above prime for good customers and 10% for those shaky, really not qualified to be sent a card in the mail that has saying "YOU HAVE BEEN PRE-APPROVED." I know someone who has a six year old child that received one of those letters.

Posted by: jfregus | May 22, 2009 7:14 AM | Report abuse

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