This is a historic day for consumers.    Starting nine months from today, we will have the right to be treated in an honest, open, and fair manner by credit card issuing banks.

How We Got Here

The idea of a credit card bill of rights has been around for a long, long time, yet until this year, almost nothing was done about it.   It is worth reviewing how the bill became a law.

History shows us that the 2008 elections were all about change.

Not to get partisan, but there was simply no chance of a Republican Congress passing this bill or George W. Bush supporting it, let alone signing it.   Before Barack Obama became President, the bill never made it out of committee.    It became law four months after he was inaugurated.    If you like him or not, he deserves credit for pushing this through.   Next time someone tells you that elections don’t matter, you can remind them of this bill.

The worldwide banking crisis stole the thunder from banks efforts to thwart this legislation.

It is very hard for the debt ridden banking industry to muster up the political power to defeat this at the moment when they are dependent on the government for their very survival.   It is even harder for consumers to feel regularly taken advantage of by the very same institutions that their tax dollars are bailing out.    The banks ran out of allies when they managed to upset both business and consumers at the same time.   Business and consumers alike are faced with credit card fees and a lack of credit from banks.   When Congress got around to acting, the banks had no one in their corner.    The were left attempting to explain how consumer protections would hurt consumers.    This argument completely lacked credibility.

Credit card companies were squeezing their best customers by jacking up interest rates and fees arbitrarily.

Many people do not have sympathy for customers facing high fees and interest rates when they don’t pay their bills.    Everyone is outraged when banks slap those same fees and interest rates on those who always pay their bills on time.    Upset those people, the strongest and most stable elements of our society, and you are guaranteeing defeat.

More Predictions

As your Reward Card Guru, I am keeping abreast of all the latest financial and travel news about how this new legislation will effect my reward card pastime.    The predictions range from “the sky is falling” to “we won’t notice any difference” and everywhere in between.    Over at the View From The Wing blog,  Gary Leff has his own predictions that are on the optimistic side.   Gary believes, as I do, that the reward card market will be largely unchanged.    He explains how the economics of people like myself will not change at all.    Frankly, most frequent travelers and reward card users pay little in fees or interest, yet they are still valuable customers, hence the reward.    Gary goes on to say that those with weaker credit scores will face higher fees, interest rates, and so forth.

Where we differ is that he things that these people will be worse off with the bill.   I disagree.    I would rather the banks price their risk accordingly, either in higher interest rates or annual fees for those who represent greater risk.   These people tend to be the most vulnerable to the “tricks and traps” method that the banks are currently engaged in.    At least it is honest to tell someone that your lower credit score means that you will be charged an annual fee or a higher interest rate.   It is dishonest to make payments due on weekends and holidays, bury obscure penalties in fine print, and punish customers for late transactions with other merchants.

It may be that the bar will be raised a bit higher for the best reward cards.   It wouldn’t bother me much if you had to have very good credit to “earn” a fee free reward card.    As I have said over and over again, these cards only make sense if you pay all of your bills in full and on time.   If you have been doing that, reward cards should remain a worthwhile endeavor for some time to come.

Congratulations America, this is a triumph for consumer’s rights!

I will probably blog about credit cards for the rest of my life without seeing any larger, more significant events than those of this week.    When President Obama signs the Credit Card Bill of Rights, it will be a whole new ballgame out there.     There is a lot of disinformation out there about the effects of this bill.    On many of it’s ramifications it is fair to say that no one knows how the future will look.

Separating Myth From Fact

So far, this is the best article I have read about the future of the credit card industry.    Bob Sullivan of MSNBC’s Red Tape Chronicles deserves credit for wading through all of the unrealistically high expectations and doomsday forecasts offered by interests on both sides of this act.    Some of his insights are clearly aimed at the most casual followers of this bill.   The fact that no interest rate cap was included should not be a surprise.   I actually believe that there might have been some serious reduction in available credit with a 15% interest cap.   I would have supported a 30% interest cap however.   If banks require that rate of return in order to price their risk,  neither the bank nor the borrower should be in the market.

Sullivan predicts it will raise your rates, and I accept that.  I would prefer an honest higher rate than a low rate in big letters, followed by bunch of tricks and traps in microscopic print.     He also seems to agree with me that people who pay their bills on time will NOT be hit with huge annual fees and other negative implications.    Sure, I know some banks will try it, but this business is so hyper competitive, I have no doubt that the market will sort it out.    I will only tolerate a minimal annual fee on my finest reward cards, like my Starwood Amex.

Oddly, he seems to feel that the new bill will not speed up the rules previously enacted by the Fed, even though it will.   The new rules take effect in February, rather than July 2010.    That is a huge difference in my book.

Celebration? Yes!

I also disagree with his conclusion that consumers should “celebrate a LITTLE”.   This bill is almost everything I could have hopped for and represents a MAJOR win for consumers.    It is rare that the government ever takes any action that has a noticeably positive effect on so many people.   I think this is the biggest victory for working people since the Family and Medical Leave Act of 1993.    Sure, I would have liked to have seen an interest rate cap of some sort, but otherwise, I couldn’t have written much of a better bill myself.

The Future

Make no mistake, banks will start raising interest rates and looking for new ways to generate fees.    My only hope is that they will at least think twice before doing so.    As this happens, consumers can and will cancel their cards for new ones when the fees become unacceptable.   This is a great time to join  myself and others who, by paying every bill in full, use credit cards as a method of payment, not a method of finance.    It will become easier to pay your bills on time now that they must send the them out 25 days in advance, and they can’t be due on a weekend or a holiday.

If you do happen to pay one bill less than full, you won’t be charged interest on previously paid charges.   If the worst happens and you skip a single payment, they cannot raise your rates.   The devil is always in the details, and these are major, major victories.

Yesterday, I tore into both the banking industry scare tactics and the New York Time’s recitation of them as fact.   It was obvious to me that their predictions of doom and gloom were highly unlikely to be realized in the hyper competitive market that is the credit card industry.

Senate Says Go!

By now, I am sure you have heard that the Senate passed the measure by 90-5, a far greater margin than I might have anticipated.   I guess, once the writting was on the wall, and passage was all but assured, few Senators really wanted to be known for voting against this measure.     My hunch is that they finally realized that there are more credit card holders than voters in this country.    It also didn’t hurt that, like the auto industry, the major players are literally dependent on  government for their day to day survival.   This makes lobbying congress exponentially more difficult.    Just like the automakers had to swallow new mileage rules, the banks are going to have to treat their customers with some measure of fairness.

Another possible factor in the bill sailing through the Senate, is that the banking industry prefers this legislation than to any mortgage industry reform.   According to Ryan Grim at the Huffington Post.   According to him: “the credit card bill is also not a fundamental threat to the structure of the financial industry. Rather than a knife to the gut, it’s more a paper cut. Being required to warn consumers before jacking up interest rates may annoy financial institutions, but it won’t radically alter the way they do business.”

The theory goes that potential regulation of the mortgage industry, allowing judges to modify loans in bankruptcy court, would have had a seismic effect on the banks, so they reluctantly went along with credit card reform.    I feel that this theory has a lot of merritt.

New York Times Consumer Affairs Writer To Banks: Yeah, Right

The most interesting article I read regarding the passage of the Senate bill also happened to be in the New York Times.    Ron Lieber of the “Your Money” section says:

For months now, the card companies have been threatening to cut rewards programs sharply to make up for revenue lost because of the new restrictions. My guess, however, is that this talk is just so much saber-rattling. Card companies want to make money, and big spenders help them do it, even if those cardholders do not go into debt.

This was my point exactly yesterday.   He goes on to say:

“If you strip away the reward component of a credit card, it’s essentially a commodity,” said Rick Ferguson, editorial director at the loyalty marketing company LoyaltyOne. “The reward is what gives it its personality. It works from a branding perspective as well as a mechanism to influence customer behavior and consolidate spending on a particular card.”

That last part is crucial. People who spend a ton generate fees galore from merchants, and that money helps the card company stay in business. So you may soon see card companies giving away more goodies or lowering annual fees for people who hit certain spending thresholds each year. American Express already does this on a number of cards.

Here, he cites merchant fees as a reason credit card companies won’t drop their best customers, just as  as I did.   He also goes further to reference branding and shopping habits of reward card holders.     Delta knows that holders of the Delta American Express are more likely to purchase tickets from Delta than another competitor.

Consumers: Bring It On

Over at The Consumerist, the headline read “Credit Card Company Threats Don’t Scare Consumerist Readers” as readers saw right through the industry scare tactics with comments like:

“This is a predictable response. I’ll be curious to see how much of it will actually happen and what is just bluster. If nothing else there are many decent credit cards offered by Credit Unions that likely will still offer no annual fee and grace periods, if not rewards.”

and:

“Charging interest immediately on a purchase? Are they trying to lose customers?”

Will Credit Be Reduced ?

Perhaps so, but only on the people who are so unlikely to pay their bills, that the only way the credit card companies can make money is by using dirty tricks to encourage them to rack up huge fees.    Frankly, this arrangement is bad for the borrowers, the lenders, and the economy as a whole.     People who are that unlikely to pay their bills, probably shouldn’t be encouraged to have more credit cards anyways.   Frankly, some of the industry’s worst threats are actually positive features.

I admit that I am a computer geek who is used to acronyms.    Allow me to translate.    FUD is an industry term for Fear, Uncertainty, and Doubt.   NYT is of course the New York Times, and CARD is the name that has been given to the credit card holder’s bill of rights, as in the CARD act.

FUD and the New York Times

FUD, is defined by Wikipedia as:

“…a tactic of rhetoric and fallacy used in sales, marketing, public relations, politics and propaganda. FUD is generally a strategic attempt to influence public perception by disseminating negative information designed to undermine the credibility of their beliefs. … FUD is a manifestation of the appeal to fear. (emphasis mine)

Keep this definition in mind as you read today’s article in the New York Times about the supposed future of credit cards.     The article is entirely about how consumers will be hurt by this consumer rights legislation.   Most of the article reads like a transcript of a conversation with bank industry lobbyists.   Like the letter from the banking industry that I deconstructed last week, the banking industry has convinced one New York Times “journalist” that the sky will fall if this bill becomes law.

He brings up the scary speculation that:

“Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.”

We have heard this all before.   No more credit card rewards, huge annual fees, and now immediate interest charges.   Give me a break.    Are we expected to actually believe that the CARD act will be so punitive that banks will no longer make money from merchant fees, late fees, foreign transaction fees and 29% interest, just because they can no longer change interest rates retroactively?     Do you really think most reward card holders, like myself, will keep their card for two seconds after banks charge interest on balances immediately upon purchase?      If anything, banks will place more of a premium on attracting customers who actually pay their bills on time.

There are so many problems with this article, I don’t know where to begin.    Let’s start with the title, “Credit Card Industry Aims to Profit From Sterling Payers”.     So your saying that an industry wants to profit off of it’s best customers who pay their bills on time?  STOP THE PRESSES, this is front page news as no business has ever tried that before.

Next, let’s look at the analysis of reward card holders, like myself, who pay their balance in full every month: “People who routinely pay off their credit card balances have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee even as they collect points for air travel and other perks.”

So I am getting a free ride by paying my bills on time?   Actually, it is the merchants who are subsidizing the free ride with the merchant fees.   Merchant fees that they pay, if not happily, to speed and ensure their payments.    Furthermore, for every ten people with a reward card who intend to pay their balance in full, I am sure at least 2 or 3 somehow fail to do so, and end up paying interest.

Thankfully, the writer does make a token attempt at the end of the article to consult an actual consumer representative:

Consumer advocates say they have little sympathy for credit card issuers, arguing that they have made billions in recent years with unfair and sometimes deceptive practices.

“The business model will change because the business model doesn’t work for the public,” said Gail Hillebrand, a senior lawyer at Consumers Union.

“In order to do business under the new rules, they’ll actually have to tell you how much it’s going to cost,” she said. “

My Conclusions

Any time a banking industry representative tells you that they oppose something out of their interest for consumers, they are lying.      It is disingenuous and patronizing to think for one moment that they, more than the consumer groups, understand or even represent our interests as consumers.      Furthermore, it is repulsive that they are taking the FUD route to express it.    Banks will always try to find new ways to charge you fees and reduce the quantity or value of your reward.    That has always been the case, and it will also be true after the CARD act becomes law.    Now, at least, they will have to play by at least some rules.

Note To The Banking Industry

Construct your arguments against this bill in terms of your own interests, not mine, and you will at least have credibility, if not agreement.     Fear as a political tactic is so over.    It died over the last eight years when our government constantly manipulated us with bogus warnings of WMDs and politically triggered colored alert systems.     The era of Fear is over, and if you didn’t get the memo, most Americans now respond to the message of Hope and Change.     When President Obama signs the CARD act, it will be yet another confirmation of this truth.