H.R. 627 The Credit Card Act of 2009 is a sweeping reform of credit card law. Many
consumers are concerned over how this act will affect their spending capacity
throughout the new year. The act is called into effect in February, meaning
consumers will have very little time to determine how to use the act to their
advantage.
While there are advantages to the consumer in 2010,
the act may also adversely affect the economy, according to some analysts.
However, conclusions are anything but cut and dried. For those that need a
little more information, here are some details about the way the first
serious credit card reform in history may affect you—and the economy at
large—in 2010 and beyond.
WHAT IS H.R. 627 – THE CREDIT CARD ACT OF 2009
H.R. 3639 The Expedited Credit
Card Accountability, Responsibility, and Disclosure Act of 2009, also known as H.R. 627 The Credit CARD Act of
2009, will dramatically affect regulations on credit cards beginning in 2010.
The act aims to improve transparency between credit card companies and the
American public, many of whom hold credit cards, under what the government
calls an “open-end consumer credit plan.”
The act requires first and foremost for credit card
companies to give consumers a month and a half (45 days) of notice if any
increases in interest rates are going to be enacted. It also gives card
owners the right to cancel their credit cards and pay any outstanding
balances once these hikes are enacted.
Credit card companies are prohibited from
retroactively increasing their interest rates for cardholders in good
standing with the company, and the act does not allow credit card companies
to arbitrarily change their agreement with cardholders. Finally, the act
prevents companies from imposing unfair or excessive fees on cardholders,
which will likely effect those with subprime and secured
credit cards.
In summary, the bipartisan measure is meant to
protect cardholders from unfair or unclear actions on the part of credit card
companies and the big banks like Bank
of America (BAC), JP
Morgan Chase (JPM), Citigroup
(C), Wells Fargo
(WFC), and etc. along with their nefarious cohort Visa (V).
POSITIVE EFFECTS OF H.R. 627
It is no secret that some credit card companies and
big banks have been acting unfairly for years, like Monex, and that the fees
they collect from the general public are not clear and reasonable. Unfair
fees and interest adjustments have been banned, meaning that consumers will
be given information on how credit card companies are changing their terms at
least 45 days in advance.
“Overdraft” coverage will also be opt-in
instead of opt-out, which means that over limit charges may not be incurred
automatically due to consumer unawareness, and that the card may be denied if
you are over the limit and this may have a positive effect with credit cards
and identification with potential credit report issues.
The terminology of credit card companies must be
made clear in advance, with promotions being disclosed in plain and simple
language, and terms that do not change during the first year of a contract.
Terms of credit cards marketed to youths and college students must be plainly
stated by both the company and the university. Finally, fees may not be
placed on store credit cards and gift cards which have not been used for a
period of time.
NEGATIVE EFFECTS OF H.R. 627
Unfortunately, as with any piece of legislation the
CARD act is not without its drawbacks. The reason that companies are able to
keep interest rates so low is that they are not accountable to a governing
body for the terms of the contracts and promotions that they use to entice
customers. Under the credit card act, it is likely that interest rates will
rise substantially. This will make new credit cards unobtainable for many
individuals with poor or no credit.
No-fee credit cards will likely disappear as a
result, and credit score checks, especially on the best credit cards, will
probably become stricter, limiting the number of individuals who can apply
for new cards. Although many Americans expect a freeze on interest rates
until the act takes effect, most credit card companies will continue to raise
rates until they are prohibited by law.
The result may be a slowing economy—many
individuals expect to buy and borrow on credit; if they cannot, they will not
buy at all. Without consumer purchases stimulating economy, the slump could
last longer and consumers could end up frustrated with the lack of options.
Less spending means less stimulus, and less spending may be the result of the
act. This is a good example of credit contraction.
IMPACT ON BANK EARNINGS
Andrew Martin of The New York Times recently wrote an extremely high quality article
about the ginormous fees Visa (V) charges and nefarious practices in the
credit card industry between Visa, Mastercard and the banks. He wrote:
Competition, of course, usually forces prices lower.
But for payment networks like Visa and MasterCard, competition in the
card business is more about winning over banks that actually issue the cards
than consumers who use them. Visa and MasterCard set the fees that merchants
must pay the cardholder’s bank. And higher fees mean higher profits for
banks, even if it means that merchants shift the cost to consumers.
Seizing on this odd twist, Visa enticed banks to
embrace signature debit — the higher-priced method of handling debit
cards — and turned over the fees to banks as an incentive to issue more
Visa cards. At least initially, MasterCard and other rivals promoted PIN
debit instead.
As debit cards became the preferred plastic in
American wallets, Visa has turned its attention to PIN debit too and
increased its market share even more. And it has succeeded — not by
lowering the fees that merchants pay, but often by pushing them up, making
its bank customers happier.
In an effort to catch up, MasterCard and other
rivals eventually raised fees on debit cards too, sometimes higher than Visa,
to try to woo bank customers back.
“What we witnessed was truly a perverse form
of competition,” said Ronald Congemi, the former chief executive of
Star Systems, one of the regional PIN-based networks that has struggled to
compete with Visa. “They competed on the basis of raising prices. What
other industry do you know that gets away with that?”
Visa has managed to dominate the debit landscape
despite more than a decade of litigation and antitrust investigations into
high fees and anticompetitive behavior, including a settlement in 2003 in
which Visa paid $2 billion that some predicted would inject more competition
into the debit industry.
The Visa, Mastercard and the big banks like Bank of
America, Citigroup, etc. are profiting tremendously while charging outrageous
fees to merchants and consumers. The populist call is to “Starve
the vampire squids!” and that is precisely what this legislation
is intended to do. But legislation has an interesting way of working
unintended consequences.
This act will likely contribute to a decline in fees
and profits for the large banks like Bank of America, Citigroup, Wells Fargo,
etc. while also increasing their exposure to credit risk with debtors that
are carrying balances and interest rate risk by not being able to maneuver as
efficiently in response to interest rate increases by the Federal Reserve.
According to Bloomberg Wells Fargo
already raised rates while sacrificing about $1B on a bet that interest rates will rise.
CONCLUSION
The banking industry and credit card companies are
facing a public relations nightmare; after all, they get to privatize the
gains with massive bonuses while socializing the losses through multi-billion
dollar bailouts. Matt Taibbi described it
best:
The world’s most powerful investment bank is a
great vampire squid wrapped around the face of humanity, relentlessly jamming
its blood funnel into anything that smells like money.
H.R. 627 and H.R. 3639 are intended to be the Nanny
State coddling the American public and protecting them from the evil big
banks. But this type of legislation will most likely have unintended
consequences such as raising the cost of credit, decreasing its availability
and preventing the savers, not that there are any real savers and producers
in the economy anymore as they have all left for Galt’s Gulch, from
being able to efficiently allocate their capital to the entrepreneur.
While I am no fan of the big banks and their vampire
squid blood funnel there is an easier way to blunt their beak and starve them
while at the same time providing a sound foundation for the American economy:
buy gold, silver or platinum, use them as currency and pass H.R. 4248
The Free Competition In Currency Act of 2009 which would repeal the capital
gains on the precious metals that is the major deterrent to their circulating
as currency in ordinary daily transactions.
DISCLOSURES: Long physical gold and silver with no interest in BAC, JPM, WFC,
C, V or the problematic SLV, Streettracks Gold ETF Trust Shares or the
platinum ETFs.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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