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Less Banks Issuing Credit Cards

Before, consumers with relatively good credit standing can expect to receive credit cards on their mail box. It has even become a nuisance for some. However, after years of doing this practice, financing companies are suddenly getting picky. Not only are they not giving out credit cards through mail anymore, they have also tightened their requirements by asking applicants for proof of their income (pay stubs, etc). And these consumers need to deal with high interest rates, more fees, and lower credit limit.

This reaction is really not surprising because banks typically tighten credit during an economic crisis. But what makes today’s development unique is that credit card companies also need to comply with the Credit Card Act of 2009. The new policy bans certain banking practices, limits fluctuating rates, and gives consumers earlier and more detailed information about their debt.

Though credit card companies have until February 2010 to implement all provisions stated in the law, a lot of them are now tightening things up before too many of the restrictions become legally effective. In addition certain provisions have earlier deadlines. For example, issuers now need to mail bills at least 21 days before the due date this August. In addition, they also need to allow at least 45 days notice before they implement any significant change regarding their terms of service.

Specific steps undertaken by credit card companies include:

-Credit standards are tightened – more applications are getting rejected. Those that get approved have smaller credit lines.

-Interest rates and fees are raised. From fixed rate, credit card companies are moving to variable rates.

-Rewards programs are enhanced for credit-worthy consumers but companies are asking for higher fees as well.

The industry is scrambling to find the new profitable segment. This is because without the flexibility to charge customers based on the risk they pose, the old calculations will no longer apply.

Credit Card Act of 2009 – The Effects

Last May 22, 2009, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 was put into effect. Otherwise known as the Credit Card Act of 2009, this law was put into place to stop banks from taking advantage of consumers. It is basically designed to end the days of “unfair rate hikes and hidden fees.” Unfortunately, the actual effect of this law was not exactly what the President and Congress have hoped for.

Since it was signed into law, the big banks have thought of innovative ways to get around it. Major credit card insurers significantly revised their terms and conditions of use. Numerous consumers reported that instead of going down, some companies have even raised their fees, increased their interest rates, and restricted credit card benefits in anticipation of the Credit Card Act going into full effect.

For example, Chase has increased the minimum required payment to 5 percent from 2 percent. Meanwhile, other card companies have increased the balance transfer fees to 5 percent though it used to be offered for free in the past. In addition, credit card limits continue to go down while interest rates continue to climb. All these raise a crucial question – how did a law that was designed to protect the consumers have an opposite effect?

There are two issues in the provision we should look into:

Interest Rate Hikes – the new law significantly hinders the ability of card companies to increase their interest rates on outstanding balances. There are only three circumstances in which the balances can be increased: (1) when introductory rate ends, (2) minimum payment remains unpaid 60 days after the due date, (3) and when the underlying index that was used to determine the interest rate changes (variable rate).

Given this, it comes as no surprise that credit card companies would take advantage of the loophole extended to them in the system. Fixed rate credit cards are now becoming outdated as card issuers try to minimize their risk. Variable rates will insulate their portfolio from unnecessary risks while ensuring their continual profitability.

Balance Transfer – there are currently a lot of no-interest balance transfer offers in the market today. But the new law changed all that. Previously, when a consumer makes purchases at regular interest, his payments above the minimum are allotted to the no-interest balance transfer. As a result, consumers will actually pay interest on his purchases (those with regular interest) until the whole balance is paid.

From a policy point of view, the Credit Card Act is good because it requires excess payments to be allocated to the loan with highest interest rates. But consumers are actually paying a steep price for this now because the introductory 0 percent offer is no longer offered as widely as it once was. And the balance transfer fees have steeply gone up.

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