Credit Card Reform and the US Consumer

Time will tell what long-term changes will take place for US consumers with the passage of the new credit card reform act. There is one thing we can be reasonably sure of, that being, an increase in demand for alternative sources of short-term consumer credit. Taken from the Cleveland Ohio Business News:

Haven’t lenders already been raising interest rates?

Yes. We have been seeing rate increases since a separate set of regulations approved last winter. That’s when the Federal Reserve adopted rules that cracked down on creditors’ ability to hike interest rates, levy fees or allocate payments in ways to keep people in debt longer. Those rules go into effect in July 2010. Some of them are nearly identical to what’s in the new legislation. But what’s expected to become law today goes further in its consumer protections and will be more difficult to alter.

What can I expect to happen in the next nine months?

The American Bankers Association says consumers should brace for even higher rates, new fees and additional restrictions on cards. As usual, you should be on the lookout for any letters from your credit card company. These could be notifications about rate or fee increases as card issuers prepare to comply with the new law. “The next nine months are going to be filled with issuers implementing changes while they still can,” said Greg McBride, a senior financial analyst at Bankrate.com, a personal finance Web site.

Will it be harder to get a new credit card?

It’s likely that people without stellar credit will have a harder time getting approved for cards. Because banks know that they won’t be able to change their interest rates on existing balances, it means they’ll be taking a longer-term risk on a customer. They will, therefore, be more conservative on the bets they make.

McBride said card issuers probably will start charging higher rates at the outset, when a customer gets a new card. The card probably will come with a lower credit limit than in the past.

“Doing away with credit card companies’ gotcha-type practices is unequivocally a great deal for consumers,” McBride said. “But that progress comes at a price, and that price is that credit is going to be tougher to come by.”

More people probably will begin turning to outlets such as payday lenders and pawn shops, he said.

“In the absence of credit cards, people in need of a short-term loan will resort to other means,” McBride said.

Greg McBride’s statement is both knowledgeable and visionary. What Mr. McBride was not asked in this interview is what will happen to US consumers should a federal APR rate cap drastically alter or eliminate their other outlets available for short-term credit. I believe his answer would amaze you.

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