Realistic Forecast For CARD Act

Today, August 20th, is the first day that some provisions of the Credit Card Bill Of Rights Act (CARD) become effective.    It is fair to say that, being a credit card user in the United States will never be the same again.    What is questionable is how the act will ultimately effect you and I, the credit card users.

How The Media Sees It

The media is filled with very poor reporting on the CARD act.   Much of the stories you read represent very little research, and are merely a recitation of the industry line that consumer protection will be bad for consumers.  On the other hand, sometimes you do find reporting that seems to be well thought out and covers new ground.

WSJ’s Take

The Wall Street Journal has a business news web site called MarketWatch.   One of their commentators, Chuck Jaffe, has his take here. It is entitled, “Over the limit: Flawed new credit-card rule fails to protect consumers.”     Let’s take a look at his predictions.

The Provision Requiring Advanced Notice Of Interest Rate Hikes Will Not Affect Most Card Holders.

His argument is that this provision only effects cards with so called “fixed” interest rates.    He contends that is a loophole that will not affect the over 90% of consumers who’s cards have variable rates.    It is tough to argue with him here, except to point out that the CARD act does set standards as to which cards can be called fixed and which must be called variable.    It is easy to see how credit card companies will either stop offering “fixed” rate cards and/or convert existing cards to variable rate terms.    In that sense, I agree that this is a loophole.

Cancellation Instead Of Rate Hikes

Jaffe also argues that consumers will now be more likely to see their cards canceled instead of a rate hike.   What he points out is that card issuers need to give you advanced notice of a rate hike, but may suspend your account at a moment’s notice.     I partially agree here.   I think that at this moment in history when credit cards issuers are extremely risk averse, that may happen.    On the other hand, as soon as the economy normalizes slightly, banks will be reluctant to cut off an otherwise hard earned customer at the drop of a hat.     Customers are still hard to find, and banks still spend a lot of money to acquire a new one.    Even if the prediction was true, we are still in a highly competitive credit card market for those with good credit scores.    If your card issuer is willing to drop you at the first hint of trouble, just choose another.

Credit Utilization Spiral

Jaffe also contends that changes in the FICO scoring formula will hurt consumers.    The idea is that the new formula will penalize you to a greater extent if you use too much of your available credit.    The result will be that you will have your credit curtailed, therefore driving up your credit utilization further in an endless cycle.     Speaking of cycles, this reminds me of what happened to bicyclists in my former home town of Atlanta.    Atlanta was not a bicycle friendly town, and someone decided that the bike trails were getting too crowded.   Their solution was to close more trails to cyclists.    You will never guess the result.

Jaffe’s theory is fine, however it has some flaws.    First, the new FICO formula is unrelated to the CARD act, it was announced long before the bill passed.   Second, by his own admission, there are several positive aspects to the new scoring system.    Finally, the credit utilization component by itself is not the largest factor in your score, so I really don’t think the actions of one card issuer are enough to start the spiral.      I do disagree with the built in incentive to have lots of credit cards to improve your score.    To me, this is an invitation to get more rewards through sign up bonuses.   To many others, sadly, this is an inducement to overspending and financial irresponsibility.

My Conclusions

Overall, this is a refreshingly honest take on the CARD act.    While many commentators are spewing the industry line that the CARD act will hurt consumers by going too far, Jaffe takes the stand that the CARD act doesn’t go far enough.    I appreciate his viewpoint, yet I believe that the perfect should not be the enemy of the good.   I am thrilled that meaningful reforms were actually signed in to law, yet I am not naive enough to imagine that the credit card companies would not change their business practices to adapt to the new law.

Ultimately, I agree with most of the points of his commentary, yet I find the title, “Flawed new credit-card rule fails to protect consumers” to be misleading and incorrect.      I have since heard from Mr. Jaffe that the title was indeed written by someone else.   By any objective measure, the totality of the CARD act will be a benefit for consumers, even if some provisions have loopholes.    No, the CARD Act is not perfect, but it is pretty darn good.