New Credit Card Rules: Good for Consumers, But What Do They Mean for Banks? | CreditShout

New Credit Card Rules: Good for Consumers, But What Do They Mean for Banks?

By Kevin / February 4, 2009

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The new credit card rules have been approved to become effective on July 1, 2010 and have been named the Credit Cardholder’s Bill of Rights Act of 2008. The new rules will ban a number of predatory practices to benefit consumers, but what will the effect be on the credit card industry?

As the new credit card rules go into effect, many of the credit card issuers will feel a decrease in profits and be forced to raise other fees while also raising the minimum credit score for credit approval, in order to lessen their risk. The availability of credit may become so tight that many people will be declined and that would be a possible drawback for consumers.

Two of the ways that banks will be adversely affected:

One of the most reasonable credit card restrictions for the consumer is the ban on retroactive rate increases and it is worthy of note because it has previously been considered an enormously unfair practice. The new change means that the credit card issuer cannot go back and charge for prior balances, which will in turn mean a loss of interest income to the banks. The credit card industry will lose billions of dollars and may have to tighten credit access and raise their fees to compensate for this big of a loss.

The new credit card change will end universal default provisions altogether. Universal default is the prerogative of the card issuer to raise your interest rate if you happen to pay another creditor late. Simply put, with the new modification of the credit card rules, the credit card company cannot hold your payment history with any creditor against you and raise your interest rate as punishment anymore. This is one of the ways that the issuer can assess a risk capacity based on credit payment history to make an informed decision whether to grant credit or not. Now, the credit card industry will basically have no means to price the account according to risk.

Other possible drawbacks of the new rules

Raising credit score limits for approvals

Strict criteria for approvals will mean that many people will be denied credit, allowing only the people with extremely good credit to be credit card holders. According to one survey that was released in October by the Federal Reserve of senior loan officers, around 50% of banks had reported that they have already raised the minimum credit score for credit availability.

Higher interest rates

We may start seeing the interest rates being raised by banks and credit card issuers in the near future. The initial interest rate could be significantly higher, since they will not be able to change the rate for the full year. Rate changes are not allowed for the first twelve months, unless otherwise noted in documentation or if you are 30 days late in paying your payment. These companies stand to lose billions of dollars if they do not find a way to compensate for the loss. The zero percent introductory rates may also be a thing of the past because of the new rules.

Since the new credit card rules have been approved, the credit card industry may be making some big changes in order to recoup the lost income and may have to tighten credit access and raise their fees to compensate for this big of a loss. Within the next year, we could see even more possible drawbacks of the new credit card rules.

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