The credit card bill has just made it out of Congress and is headed for President Obama's desk. The bill is expected to be signed by the President on Friday. As the credit card bill nears completion, the credit card industry is looking ahead to an ominous future.
Risky borrowers have been very lucrative for credit card companies for the past few years. Lending to borrowers with low credit scores may mean that the chances of them paying their debts are low but creditors have not been daunted. Instead, credit card companies turned the situation around and made enormous profits from the fact that payments from credit cardholders with low credit scores usually go to interest rates and fees instead of their debts. Basically, these cardholders pay the credit companies not to decrease their debt but to be allowed to keep them and to have access to more credit.
All this is going to change once the credit card bill becomes law. The credit card bill primarily penalizes credit card companies that take advantage of consumers' inability to meet their monthly debt payments and profit mainly by offering very high interest rates and excessive fees. It will also put some control on the ability of credit companies to arbitrarily raise interest rates and fees. Lastly, the bill will aim for full disclosure between the credit card companies and the consumers. This means that credit card companies will have to make credit agreements publicly available by posting them online. Credit card companies will also have to inform consumers well ahead of time of any interest rate increases and give viable reasons for them.
Financial analysts are trying to calculate how much of an impact the bill will have. The task is made doubly difficult by the fact that card companies rarely disclose how much they earn from interest rate hikes, penalties, and other fees. Robert Hammer operates a credit card consulting company. He puts the credit card industry's revenue loss of income from overall interest at $10 billion. This year, figures place the penalty fees that credit card companies will be imposing at $20.5 billion. Notably, last year, it was $19.1 billion.
According to Calyon Securities analyst, Craig Maurer, Credit card companies whose portfolios skew towards over-limit fees, late-payment fees and penalty repricing have the highest risk. Already, the industry is beginning to look into how they are going to realign their portfolios. Executives from the industry continue to emphasize the loss of credit, especially for risky borrowers. Front end fees are also likely to rise to offset the limitations imposed on raising interest rates after a cardholder fails to pay on time.