May 26, 2009

President Obama on Friday signed into law a “Credit Cardholders Bill of Rights” that will constitute a major change in the way credit card issuers can treat their customers. In particular, issuers will lose the ability to increase interest rates “any time for any reason” as they have in the past. Many other common practices will also be curtailed or eliminated altogether. Among the major changes:

• Card issuers will no longer be able to hike interest rates on existing credit card balances, unless you are over 60 days past due on a payment. Even then, they will be forced to restore your old rates if you pay on time for the following 6 months.
• If issuers plan to increase rates, they must give customers 45 days notice, up from the previous 15 days.
• Card issuers will not be allowed to raise rates in the first year after a consumer obtains a new card.
• Card issuers will no longer be allowed to let a cardholders go over their card’s credit limit — and be charged an over-the-limit fee — unless the cardholder approves it.
• If a customer has balances at different interest rates — for example, a balance from a 0% introductory offer and a higher-interest balance — any payments must be applied to the higher interest balance first.
• Credit card issuers must send bills 21 days before the payment due date, up from 14 days.
• College students can no longer be issued cards if they are under 21, unless they can show proof of income or have a parent or guardian co-sign.
• Fees on subprime credit cards for poor credit customers will be severely limited.

While the new law obviously is good news for many cardholders who’ve been stung by interest rate increases despite “good behavior,” it will undoubtedly have other consequences as card issuers look to recoup profits that are being taken away by the new law. Among the possibilities:

• General interest rates could rise across the board, as issuers have less latitude to increase rates on riskier customers.
• Fees may increase on late payments, balance transfers, cash advances, international transactions, and other activities.
• Annual fees, rare in today’s environment, may reappear, especially for consumers with less-than-excellent credit histories.
• New fees not covered under the law may be created.
• Poor credit customers may not be able to obtain credit at any price.

The new law takes effect in about 9 months, but most credit card issuers have already begun taking steps to adjust to the new reality, with interest rates rising steadily in 2009. While some of these rate increases are in response to overall credit market difficulties, some are undoubtedly tied to the more regulated future that card companies were already anticipating.

May 12, 2009

Advanta Corp, which specializes in small business credit card issuance, has taken the drastic step of completely shutting down the issuance of credit beginning June 10. No new Advanta credit cards will be issued, and current Advanta customers will not be allowed to make further purchases with their cards. (Current customers will of course be liable for debts they’ve incurred.) While Advanta is leaving the door open to conducting business in the future, the new mode of operation will be to collect receivables from past customers and use that capital to pay off shareholders in Advanta’s securitization trust.

Advanta’s uncollectable debt had reached 20 percent and the company reported a loss of $76 million in the first quarter. At least one stock analyst predicted the company was headed for bankruptcy.

Advanta’s current small business customers will likely be scrambling for new credit lines, as the business credit card market has shrunk significantly. Credit card issuers that once saw the small business market as fertile ground for growth have scaled back their offers. Among the cards still marketed, interest rates have risen and card reward programs have been discontinued or watered down.