With the recent signing of the credit card bill by President Barack Obama, it seems that consumer friendly credit cards will be on the way. Or will it?
Throughout the deliberations of the credit card bill, the credit card industry has largely been on hand providing dire warnings that the passage of the bill could have largely negative effect on the credit industry. According to credit card companies, with the passage of the bill, American consumers will experience a drying up of credit.
R.K. Hammer Investment Bankers' chief executive officer Robert Hammer, who also serves as an adviser to credit card companies, said that the credit card bill, aside from protecting consumers, may also force banks to lower the available credit, cutting available credit by as high as $90 billion in order to decrease risks.
According to New York University economics professor Andrew Caplin, with such a high reduction on credit, the overall economic recovery led by consumer spending will be hurt. According to figures, the U.S. Economy relies heavily on consumer spending, with 70% of the economy relying on it.
Caplin says that, “The bill may stop various forms of abuse, but it will stop some various forms of credit. If the economic recovery is going to rely on consumer spending, it will be a long wait”.
According to Britt Beemer of America's Research Group, consumers who use credit cards usually spend more. With the credit card bill reeling in credit card spending, luxury items such as electronics will be hurt. The apparel industry, already ailing in this economy, will be one of the industries most affected.
However, some are saying that the credit crunch is already underway. According to figures in the May Federal Reserve report, consumer credit dropped by $11.1 billion during March. This makes it the biggest drop in credit since 1990, equivalent to an annual rate of 5.2%.
Josh Frank, a supporter of the bill and center for Responsible Learning senior researcher, puts the blame of credit drying up to the practice of reckless lending and the lack of regulations in the credit card industry.
According to Frank, “The impact on available credit has been greatly overstated as an industry tactic to scare people to be against the bill”.
Although the bill puts restrictions on arbitrary interest rate and fee increases, banks can still recoup losses by increasing the initial rate. Incidentally, an issue which consumer groups find troubling. However, major credit card companies have already stated that, to recoup their losses, they will probably turn to increasing initial borrowing rates, issuing annual fees and stopping reward programs.
In the end, the issue will be decided by the credit card industry's reaction to the bill and the change in the buying habits of American consumers.