Credit-card revisions sail to Senate win

5/20/2009

WASHINGTON Landmark credit-card legislation, poised to reach President Obama s desk in the next few days, will force the card industry to reinvent itself and consumers to rethink the way they use plastic.

The Senate approved the bill yesterday by a 90-5 vote. The House is expected to approve the bill overwhelmingly, possibly as soon as today, and it then will go to President Obama, who has pushed hard for the legislation.

All four senators from Ohio and Michigan voted for the bill.

It would sharply curtail card issuers ability to raise interest rates and charge fees. The bill also would require card companies to make contracts easier to understand and available online.

When Mr. Obama signs the bill into law as expected, the $960 billion credit-card industry will go through restructuring that could have broad implications for consumers.

The bill will bar card companies from raising rates on existing balances unless the borrower is at least 60 days late. If the cardholder pays on time for the next six months, the company must restore the original rate. On cards with more than one interest rate, issuers will have to apply payments first to debts with the highest rates, which would help borrowers pay off their cards more quickly.

Treasury Secretary Timothy Geithner said the bill will help create a more fair, transparent, and simple consumer credit market.

Card execs said the changes will force higher rates and annual fees on delinquent customers and those in good standing.

Under the proposed rules, firms would offer fewer cards to high-risk borrowers. The bill requires people under 21 who seek a credit card to prove they can repay it or that a parent or guardian is willing to pay off their debt if they default.

Bankers warned the measure would restrict credit at a time Americans need it most. They defended existing interest rates and fees on grounds their business lending money to consumers with no collateral and little more than a promise to pay it back is very risky.

Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, an industry group, said available credit could be cut by as much as $2 billion. Those with the weakest credit would be hardest hit.

When credit cards were introduced 50 years ago, issuers practiced a one-size-fits-all approach of charging an annual fee and roughly the same rate of about 18 percent to everyone. As the industry deregulated in the 1980s, around the time credit scores were introduced, issuers were able to separate the risky from the not-so-risky and tailor card contracts.

The money they made from interest charges became importan revenue source. The industry makes $15 billion annually from penalties, and one-fifth of consumers carrying card debt pay a rate above 20 percent, according to figures from the White House. To make up for the lost revenue, card issuers will turn to customers who pay what they owe in full and on time, analysts said. Gone will be the days when the creditworthy had low interest rates and cards that offer rewards. Annual fees are likely to return. Offers for zero-percent balance transfers are likely to become rarer.

Consumer groups also have a more immediate concern: Most of the bill s provisions won t go into effect for nine months, giving issuers time to hike rates.