Credit Changes On The Horizon

New Laws Are Designed To Protect Consumers, But They Could Mean Some Customers Will Have A Harder Time Borrowing.

Ready access to credit, coupled with teaser interest rates, generous reward programs, grace periods and the absence of annual fees enticed many Americans to rely on credit cards for even the smallest purchases. But when credit card companies hiked interest rates with little warning and slapped on snowballing penalties, consumer groups fought for change. Now that President Barack Obama has signed a credit card reform bill into law that curtails many of the fees and billing practices that have been so lucrative for card issuers, credit card representatives are predicting these perks may be harder to find as the industry evolves in response.

"The new laws fundamentally change the business model of credit cards," said Peter Garuccio, spokesman for the American Bankers Association.

"At the end of the day, you are still talking about a loan, and lending is inherently a risky business," he said. "What the new laws do is limit the ability of card issuers to price for risk."

According to an ABA statement, people such as younger consumers with short credit histories or small-business owners could have limited access to credit. Interest rates may start higher because they would be locked in for 12 months under the new bill, and credit lines could be smaller.

Consumer advocates and industry watchers, on the other hand, say credit card companies will continue to profit under the new rules, from fees charged to both consumers and merchants. They anticipate that there will be credit available to good customers, as well as incentives to swipe.

"There will be competition among banks for good customers," said Pamela Banks, senior counsel for the Consumers Union. If one bank charges an annual fee, "there will probably be another bank out there" that won't, she said. Otherwise, people will start using debit cards or paying cash.

"I do not think that the sky is falling like the banking industry may be saying," said Bill Hardekopf, CEO of lowcards.com. "Issuers are still able to make money on credit cards and still will."

Under the new bill, issuers will have to give consumers 45 days' notice before instituting material changes to contracts, such as increasing interest rates or changing fees. "That will give them a lot of power over whether or not they want to stay with their bank," Banks said.

"The whole point of a promotional rate is to get you to leave your credit card company," she said. "Banks compete for business and I think they will continue to compete. The difference is that everyone will understand the terms of the relationship."

And banks will continue making money on people who carry a balance. About 42 percent of customers who had credit cards paid off their balance in full each month, according to 2006 Federal Reserve Board data. "Every so often, those people mess up and don't pay," Hardekopf said.

Other penalties not addressed by the legislation, such as balance transfer fees and cash advance fees, could also increase, he said.

But of the more than 1,000 credit cards available, about 80 percent do not charge an annual fee right now, Hardekopf said. And cash-back rebates may be harder to find, along with rewards programs such as frequent-flier miles, he said.

Charles Shafer, University of Baltimore law professor and president of the Maryland Consumer Rights Coalition, scoffed at this threat. Consumers end up subsidizing the costs of rewards through higher prices, he said.

"I'd rather pay the merchant less and not get all the mileage," Shafer said. "Just charge us a decent rate for using your card, and we'll take care of the ticket ourselves."

Odenton resident Ted Ploskon agrees. He uses his Washington Mutual Visa rewards card for most purchases instead of cash because his credit union ATM is inconvenient.

He has redeemed the points for Best Buy gift cards to use on planned purchases. "I really didn't care about rewards - I just noticed it was piling up," the retired federal employee said.

But if the bank decided to charge an annual fee, he'd switch to a card offered by his credit union right away. "If instead of charging an annual fee, they do away with rewards, it wouldn't bother me one bit," Ploskon said.

Banks also make money from merchants by charging interchange fees on each purchase.

"The credit card industry would have you believe that a person who pays off their bill every month is getting a free ride on the use of a credit card," said J. Craig Shearman, vice president of government relations for the National Retail Federation.

However, in 2007, stores paid $48 billion in interchange fees to credit card companies to process each payment based on a percentage of the price. Those percentages are higher for rewards cards, Shearman said, and merchants pass the fee cost on to consumers in higher prices.

"They are definitely paying a fee to pay with a credit card," Shearman said. "Credit card companies are profiting enormously from that."