Credit Card Use to Change?

There are whispers circulating around credit card companies about fundamental changes ahead. A few are forecasting the effective death of the industry, but most predict something less radical.

The majority expect to see a new era in which banks take time to discover what consumers need–and value–in their credit card use, and respond with offers that both cost and deliver more. At the moment, card holders tend to see products as a commodity, and–in all but exceptional circumstances–make buying decisions based exclusively on cost–credit card rates and fees.

The hope is that, by offering (and charging for) new, valuable services, card issuers will move from being “fear-based” enterprises to “value-based” ones. But it’s hard to see how that can work out unless the companies drastically reduce the number of credit cards they issue, and cancel many of the accounts held by less profitable customers.

Credit Card Regulation Behind Move?

The industry would have you believe that recent and proposed credit card regulation is behind the possible changes. And they’d be right, at least in part. Earlier this week, the New York Times reported that JPMorgan alone could “lose income from legislation limiting credit card and overdraft charges, perhaps as much as $1.25 billion.” However, most card issuers are more exposed to unrepayable credit card debt than to regulatory issues, and double-digit rates of “charge offs” (when banks write off debts as uncollectible) have been routine for many card companies for some time.

But obviously it’s easier to rail against the government than come to terms with one’s own past unwise lending policies. And there’s a better chance of lobbyists heading off further regulation if the card companies focus on on the financial impact of the recent Credit CARD Act.

Credit Card Debt Main Driver?

When it comes to higher credit card rates and fees–and to any future structural changes in the industry–it seems likely that the main driver will be poor lending decisions in the past. And it’s not clear that things are getting much better today.

Last Friday, the Federal Reserve published its latest data on consumer debt and, on first reading, it contained good news. Outstanding revolving credit (which mostly comprises credit card debt) stood at $864.4 billion in January. Of course, that’s a huge amount, but it’s $70.7 billion less than it was in the first quarter of 2009, and a whopping $93.7 billion down on its highest recent level in the last quarter of 2008.

So surely that means that Americans have responded responsibly to the credit crunch, and have been paying down their credit card debt. Well, maybe not. Yesterday, the Associated Press ran a story that contained a sobering figure. It said: “In 2009, banks wrote off a record $83.27 billion in credit card debt.”

Credit Cards in the Future

It’s hard to see how that sort of charge-off rate can be sustained. And, if the economy picks up, it won’t have to be. But credit card companies are unlikely to want to put themselves in the same position ever again, so a restructuring of the industry is very much in the cards.

It may be that in the future many fewer Americans will have credit cards, and that those who do will pay more, and receive new and valuable benefits. But, as long as other financial products are created to fill the gaps, that may not be such a bad thing.

Credit Card Regulation to Tighten?

Yesterday, the Federal Reserve unveiled fresh proposals that it hopes will provide new protections for credit card users. These are intended to prohibit many unreasonable fees, and they will also require banks to “reconsider” recent hikes in credit card rates. In a statement, Federal Reserve Governor, Elizabeth A. Duke said:

This proposal addresses two key costs of using a credit card–fees and interest rates. The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year.

Credit Card Terms

The Fed’s ideas (they’re a long way from being implemented) for regulating fees fall into three broad categories:

1. Every penalty fee would be capped to the dollar amount of the transgression that triggered it. So, for example, the fee for the late receipt of a $20 minimum payment could not exceed $20.
2. All inactivity fees to be banned.
3. One violation of credit card terms = one fee. So no more multiple fees for a single transgression.

Credit Card Rates

When it comes to credit card rates, the Fed has two proposals:

1. Credit card companies must advise customers why a rate has increased.
2. “Require issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.”

Nobody Loves the Fed

The Fed’s suggestions seem to have been met by near-universal derision, which can in itself be a considerable recommendation for any regulatory announcement. In covering the story, the New York Times and the Washington Post reported negative reactions from both bankers and consumer groups.

Kenneth J. Clayton, for instance, a senior vice president of the American Bankers Association, told the Times: “The issues addressed by this proposal are complicated and, despite good intentions, may mean higher prices for credit card customers, and some may see their accounts closed.”

Meanwhile, Nick Bourke, manager of the Safe Credit Cards Project at the Pew Charitable Trusts, complained to the Post: “They didn’t fully seize the opportunity.”

Credit Card Regulation Remains Challenging

So far, trying to make credit card use more fair has been like trying to produce a ballet for cats. As soon as the main players learn what’s required of them, they set about finding ways to do their own thing. Certainly, credit card companies have been exceptionally creative in getting around each new wave of regulation.

And some believe that–owing to its close connections to the banking industry–the Fed is the wrong body to regulate card issuers. So when it was recently suggested that the proposed new Consumer Financial Protection Agency should be housed within the Fed, many were unhappy.

For example, House Financial Services Committee Chairman, Barney Frank (D-MA), said in an email sent to this reporter yesterday: “My main objection to housing this critical function in the Federal Reserve has been the central bank’s historical failure to implement consumer protection as a central part of its mission and role.”

Credit Cards Vital

One thing’s for sure. Living without credit cards in modern America is difficult. And a fair way to make them affordable needs to be found.

Credit Card Companies Asking for Cancellations

With their recent imposition of higher credit card rates and new annual fees–not to mention inactivity fees–it feels as if some card issuers are actively encouraging their customers to cancel accounts. Certainly, large numbers of consumers resent being asked to pay for something that was previously offered free and are asking themselves whether they need so many cards.

But before cutting up any plastic, you should think twice. Because closing a card account may well adversely affect your credit reports.

Credit Score Calculations

Your FICO credit score–the one that most lenders use–is calculated using five criteria, and the importance of each is represented by the percentage weighting shown in the following list:

1. Your payment history (35 percent)–mostly affected by late payments
2. How much you owe (30 percent)–most importantly, the difference between the amount you’re currently borrowing and your available credit
3. Length of your credit history (15 percent)–generally speaking, the longer your credit history, the higher your score
4. New credit (10 percent)–your score is likely to suffer if your credit report shows multiple recent applications for new credit
5. Other factors (10 percent)–a whole list of these, including whether your mix of credit types (mortgage, auto loan, credit cards) is healthy

Credit Scores and the Cancelling of Credit Cards

The reason your FICO score might suffer if you cancel a credit card is associated with the second factor in that list. The relationship between your available credit and the amount you actually owe is called your “utilization ratio.” When you reduce your available credit by closing an account (and so losing that card’s limit), you’re likely to increase that ratio and potentially harm your score.

Of course, if your use of credit is already low, then the effect is likely to be minimal. But if you transfer balances, the impact could be more damaging.

One expert gave yesterday’s Washington Post an example. Suppose someone closed card accounts in a way that increased their utilization ratio from seven percent to 85 percent. If that person’s credit score had previously been in the 800s, it could end up in the low 700s, or even in the high 600s, solely as a result of the ratio rise.

Credit Scores Matter

The U.S. General Services Administration’s website explains the impact that a poor credit score can have on all borrowers. This particular scenario shows the effect on a couple who are buying their first home:

Let’s say they want a thirty-year mortgage loan and their FICO credit scores are 720. They could qualify for a mortgage with a low 5.5 percent interest rate. But if their scores are 580, they probably would pay 8.5 percent or more–that’s at least 3 full percentage points more in interest. On a $100,000 mortgage loan, that 3 point difference will cost them $2,400 dollars a year, adding up to $72,000 dollars more over the loan’s 30-year lifetime.

Of course, interest rates (and property prices) have changed since that example was written. But the point remains valid. And that is–credit reports matter.

Credit Scores Down

Karma Credit last week released its U.S. Credit Score Climate Report. And it showed that the national average credit score dropped two points in January to 669. That’s the first time it’s been below 670 for a year.

Ken Lin, CEO of Credit Karma, told Collections and Credit Risk magazine that he expected credit scores to hold steady through the rest of this year, and told the publication: “I think many people really started to get a handle on their finances in 2008. They started to pay attention to how their credit was affecting them. This is why you don’t see such big decreases [in 2009] as you may expect.”

But Credit Karma’s report contained even better news. Since December, consumers with credit cards have paid down their debt by two percent. That tends to confirm the Federal Reserve’s analysis of the trend, which shows continuing debt reductions throughout 2009 and back into 2008.

Credit Card Debt in the Larger Picture

The report also revealed some fairly startling figures about overall consumer indebtedness. It says that, in January 2010, the average consumer with an account had:

• $7,925 in credit card debt
• $180,190 in home mortgage loans
• $51,919 in home equity loans
• $14,736 in auto loans
• $26,337 in student loans

Of course, it’s widely acknowledged that personal debt in the U.S. is high. The Federal Reserve says that, in December, American consumers owed $2.46 trillion. But, somehow, seeing it broken down by individual account holders makes it all the more depressing.

Credit Card Companies Look to Brighter Future?

A little more cheerfully, the big credit card companies released monthly data Tuesday that contained mixed news. The Wall Street Journal said that the figures “…reinforce the challenges facing lenders.” However, Forbes ran its report under the headline “Clouds Parting over Credit Card Troubles,” and said that “Improvements in delinquency figures could signal that fewer credit card defaults are ahead….”

But even the Journal had to admit the possibility of light at the end of the credit card tunnel:

“Delinquency trends indicate we’re moving toward lower charge-offs eventually,” said Scott Valentin, an analyst at FBR Capital Markets. But “clearly, it’s still a stressed environment.” Valentin said he expects charge-offs–credit-card loans on which lenders don’t expect to collect–to peak by April-May.

Credit Card Offers Increasing

In separate credit card news, the Synovate Mail Monitor was published last week, with the following headline, “Credit Card Offers Make a Comeback to US Households,” and continued:

During Q4 2009, US households received 398.5 million credit card offers, a 46% increase from the 272.5 million offers received during Q3 2009. However, volumes are still fairly tepid when compared to 668.1 million offers mailed during the same time a year ago.

All of which is extraordinarily good news for aficionados of junk mail.

Credit Card Regulation Only a Week Away

After what has felt like an eternity, the Credit CARD Act of 2009 finally comes fully into force (except for certain provisions that affect gift cards) on February 22. And few will breathe a bigger sigh of relief than parents whose children have student credit cards.

That’s because credit card companies long ago began to direct their slick marketing techniques toward those on college campuses. Of course, they saw all youngsters as potential new customers who could remain loyal credit card users for decades. But students were particularly valuable because college graduates are more likely than most to be both affluent and, consequently, good credit risks.

Credit Card Companies on Campus

Back at the end of 2008, the New York Times investigated some of the methods that card issuers used to target students. Perhaps the most surprising fact uncovered in the subsequent report was that hundreds of colleges across the country had signed agreements with card companies. In fact, Bank of America alone had 700 such deals in place at that time.

Many contracts contained confidentiality clauses, so their details remain unknown. But the Times found that one university received a dollar for every successful credit card application (as long as the account wasn’t closed within 90 days), three dollars for each card with an annual fee, and half-a-percent of all the retail purchases made using cards that fell within the deal.

The Times quoted a student newspaper editorial from a different university: “…it doesn’t take a giant leap for someone to ask why the university should encourage responsible spending when it receives a cut of every purchase.”

New Protections

As of next week, the new credit card regulations sweep away these cozy deals, along with the ubiquitous tents, and stands that credit card companies used to erect on campuses. Gone too willbe the T-shirts, blankets, sandwich vouchers, and other promotional goodies that card issuers used to exchange for completed credit card applications.

Because the Credit CARD Act not only outlaws these, but also makes it illegal to issue a card to anyone under 21-years old who does not have independent means unless their parent, guardian, or another adult co-signs the agreement. Even then, the adult will have to give written permission before the credit limit on the card can be raised.

Giving Leverage to Parents

This provides parents with some much-needed leverage when protecting their offspring from unmanageable credit card debt. And if those parents believe that their child is unable to take responsibility for a credit card at all, then it allows them to insist that the student use only cash, or a combination of cash and a debit card.

Of course, there are real advantages to having cards for those who can manage them responsibly. Part of one’s credit score is based on the length of one’s credit history. So, for example, college graduates who haven’t had a card could pay more for, say, a car loan when they’re 23 or 24 years old. They might even be declined completely.

Credit Cards and the Young

It’s generally a mistake to see credit cards as instruments of the devil and credit card companies as invariably evil. In the modern world, it can be tough to get by without a card, and many students learn very successfully how to manage their finances during their college years.

But few will mourn the passing of the years that saw credit card issuers regarding campuses in much the same way that the cowboys wearing black hats used to view small, wild west towns. And most parents welcome the opportunity to participate more actively, and (if they have any sense) more constructively in their children’s financial lives.

Credit Card Trends Are Toward Lower Balances

Friday, the Federal Reserve published its consumer credit figures for December 2009. And they show that credit card debt reduced for the 15th consecutive month. That is the longest period of decline since the Fed began compiling the data back in 1968.

Revolving credit, most of which is credit card balances, fell at an annualized rate of 11.7 percent in December, leaving $866 billion dollars still to pay down.

Credit Card Use Changing?

Some observers see these figures as (to quote Friday’s BusinessWeek): “…some indication Americans are getting their balance sheets in better order.” But it may be more complicated than that.

The Fed data also showed that non-revolving credit (auto loans, personal loans, and so on) actually went up by $6.8 billion in December. While that was not enough to fully offset the reduction in revolving credit brought about by changing patterns of credit card use, it may suggest that consumers have not become entirely averse to borrowing. So is it just their cards that Americans have come to distrust?

Credit Card Companies Less Popular?

USA Today thinks that may be the case. It ran a piece yesterday under the headline, “American consumers just say no to credit cards.” It said:

Tim McFarlin, a consumer bankruptcy attorney in Irvine, Calif., 34, stopped using credit cards eight years ago because he thought the industry’s business practices were unfair to consumers. “Any time there’s even a hint of a financial issue in the consumer’s life, the credit card company will raise the interest rate to the high 20s or 30%,” he says. “They’ll do anything they can to make life as difficult as possible.”

…The public’s opinion of credit card companies, which has never been particularly high, has plummeted during the past two years. Forty-seven percent of consumers surveyed in July said they trust credit card companies less now than they did a year earlier, according to Auriemma Consulting. Only national banks and the federal government fared worse.

A Hard Habit to Kick

In using the phrase “just say no” in its headline, USA Today was alluding to the similarities between some credit card use and drug use. Both can provide instant gratification, but carry a cost that has to be paid in the future. And both are hard habits to kick.

So just how much of the reduction in revolving credit is down to greater self-discipline and a genuinely changed relationship between Americans and their cards, and how much is down to lower credit limits and fewer new accounts being opened? Bear in mind also that some is likely to be a result of card issuers writing off some balances as uncollectable.

Good Times Starting Again?

Only time can tell whether consumers will keep those reduced balances down. But the Financial Times reported yesterday that those who have been relatively unaffected by the recession are beginning to return to their old spending patterns. It interviewed the heads of various luxury good manufacturers who identified a new readiness to buy premium and prestige goods.

One of them, Fabrizio Freda, chief executive of Estée Lauder, observed: “We view this as a return of the aspirational consumer.” And another, a senior executive at Polo Ralph Lauren, said last week that the fashion brand and retail company had “slowly begun to see the gradual return of our core luxury customer, including buyers of couture dresses that sell for more than $4,000.”

It will be interesting to see whether less fortunate people similarly revert to their old spending patterns once the effects of the recession wear off–and whether they go back to their old habits when it comes to credit card use.

Credit Card Debt vs. Mortgage Payments

Your mortgage is a “secured” debt. That means that if you get seriously behind with your payments you risk losing your home through foreclosure. Credit card debt is “unsecured.” So being delinquent with your payments may be expensive and ruin your credit report. But it’s unlikely to leave you homeless.

You’d think that it would be common sense to prioritize mortgage repayments over those for credit cards. But most Americans who find themselves unable to pay both are choosing to keep up to date with their cards.

New Payment Hierarchy

This strange phenomenon first arose in the first quarter of 2008. For the first time, more people were current with their credit cards and delinquent with their mortgages than the other way around.

But a new report, published yesterday, from TransUnion says that the practice of prioritizing credit card payments is becoming more widespread. In the third quarter of 2009, 6.6 percent of consumers were behind with their mortgages while current with their cards. At the same time, just 3.6 percent were current with their mortgages while delinquent with their cards. Those figures are starkly different from those in the first quarter of 2008, when the numbers were 4.3 percent, and 4.1 percent respectively.

Worse for Bad Risks

Those in the lowest scoring risk segment were much more likely to prioritize keeping their credit cards current. Twenty-nine percent of those in that category were paying their cards while letting the mortgages slide in the third quarter of 2009, while only half that number were giving preference to their mortgages.

Credit Card Trends

This shift in mortgage and credit card trends is probably being driven by a number of factors. Ezra Becker, TransUnion’s director of consulting and strategy for its financial services business unit, identifies some:

The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market have all come together to redefine how consumers are managing their finances and meeting (or not meeting) their credit obligations. The insight gained through this analysis reveals a lot about changing consumer preferences. The financial services industry must recognize and adjust to the payment hierarchy shift with judicious modifications to business models, new assessments of specific areas of risk, and by strategic revisions to acquisition and account management strategies.

Other Factors?

The TransUnion report doesn’t try to go further and explain why this change in many people’s payment hierarchies has come about. However, five possible causes come to mind.

1. Credit card companies are generally more aggressive in chasing delinquencies than many mortgage lenders.
2. Cards provide an immediate source of credit, and losing the use of them can mean being unable to buy food, cover transportation costs, and generally access things that are immediately essential.
3. Too many people are unrealistically optimistic, and think that “something will come up” that can rescue them from a seemingly distant foreclosure.
4. Whether you’re behind on your mortgage payment or your credit card payments makes little difference to the impact on your credit report.
5. Credit card companies have made late payment and overlimit fees much more expensive in recent years

But, whatever the causes, the trend toward paying credit cards at the expense of mortgages is likely all too often to end in tears.

Credit Card Debt

Customers who pay their balances in full every month may be treated by credit card companies as if they’re royalty, but they’re not actually all that profitable. Some pay monthly fees, but they rarely, if ever, contribute to the card issuers’ principal consumer revenue streams, which are interest, late fees, and overlimit fees.

Credit card debt is the lifeblood of the industry, which is why balance transfer deals are still being offered. At the same time, credit card companies are, according to IRA Bank Monitor, having to write off some 10.35 percent of all such debts as uncollectable. So card issuers are particularly looking for customers who have good or excellent credit scores, but who also carry balances forward.

Balance Transfer Credit Cards–the Good Old Days

It feels like a different era, but it was only a couple of years ago that credit card companies were falling over themselves to attract new customers. Indeed, it was at the end of 2008–just 14 months ago–that U.S. credit card debt reached its highest point and topped $445 billion.

But its been a while since it was widely possible to transfer your credit card balance without incurring a fee. That’s because credit card companies realized some time back that many smart customers were transferring their balances immediately every time their zero-rate introductory offers expired. So those consumers were effectively borrowing money without ever paying any interest, something that those in financial services find anathema.

Balance Transfer Credit Card Deals Today

WBKO just published a list of current (well, they were current last week when the feature was published; check with the card issuers to see if they’re still the same) fees initially charged by some of the major banks for balance transfer credit cards. These are expressed as a percentage of the sum to be transferred:

• American Express–three percent
• Bank of America–four percent
• Capital One–nil for most, but three percent for a Platinum Prestige card
• Chase–five percent
• Citi–three percent
• Discover–five percent

Before Making that Credit Card Application…

Dennis Santiago, CEO of Institutional Risk Analytics (IRA), wrote a piece about transferring balances between credit cards for the Huffington Post last week. In it, he said:

Favorable introductory rates and good payer rates are the “toasters” of the credit card world. They’re meant to capture and retain valuable “interest on outstanding balance” paying customers. This means if you have one of these credit card accounts and diligently pay the minimums on time every month–yup, yup–you are valuable to that bank. Perk up! You are valuable whether you have a checking account there or not. What you also need to realize is that every other credit card issuers out there also covets you. That’s why those things keep clogging the mail box and wink at you from the computer screen every time you log on or off your online banking. Just make sure to keep paying that minimum and your account will keep getting the favorable treatment.

But no matter how desirable you are to card issuers, you should carefully check out the different deals on offer before you make any credit card application. And you can begin to assess those deals by using the credit card calculators here.

Credit Card Companies Aren’t Charities

People who are fortunate–or clever–enough to pay their card balances on time, and in full every month have for years enjoyed free credit card use. Recently, that happy situation has become more rare, but plenty of consumers still have the privilege. Meanwhile, those who belong to credit card rewards schemes actually receive valuable benefits just for spending.

But credit card companies aren’t charities, and somebody has to be paying for their premises, staff, IT infrastructures, dividends, executive bonuses, and so on. So how–at least in good economic times–do they make money?

Two Sources of Income

The credit card industry has two principle sources of income. First, there are the fees, penalties, and interest paid by those who are less good at managing their money, or who find themselves–sometimes through no fault of their own–in financial trouble. Earlier this month, the Wall Street Journal quoted one analyst who said that, in 2009, penalty fees alone reached $22.9 billion, up from $19 billion in 2008.

The industry’s second major revenue stream comprises so-called “interchange fees” (also called “swipe fees”). Toward the end of last year, the Government Accountability Office (GAO) conducted a review of interchange fee practices. Its report found that, generally, anything between one and three percent of the total cost of every transaction is taken by the credit card industry in swipe fees.

It gives an example of a $100 transaction from which $2.20 is deducted for these fees. Of this, $1.70 ends up in the credit card issuer’s coffers, and 50 cents is kept by the “acquiring institution” (the biggest of which are Visa and MasterCard) for processing the transaction.

Credit Card Use Costs Everyone

Another Wall Street Journal piece, published yesterday, suggests that interchange fees add up. Quoting a Nilson report, it says that they amounted to $62.7 billion in 2008, up three percent from the previous year.

But, of course, the merchants who pay these fees have to recoup the costs somehow, and the only way they can do so is by increasing their prices. CBS4 reported earlier this week an example of this in action. It said:

Joel Campos, who owns a restaurant, says he tried to avoid these fees.

“We opened in 1995 and we accepted only cash because we knew that the fees from the credit card companies were high,” said Campos.

But as more customers requested to pay with plastic, Joel was forced to raise his prices.

“Once I accepted the first credit card, I put like 10% more in the prices,” explained Campos. “I prefer to have low prices for the customer than accepting credit cards.”

So everyone–not just card users, but those, including the poor, who pay cash–end up suffering. In fact, the CBS4 report went on to suggest that, in 2008, interchange fees cost every American family an average of $427.

Credit Card Regulation on Interchange Fees?

The National Association of Convenience Stores (NACS) is just one body lobbying for new credit card regulation to rein in swipe fees. It says:

NACS retail members cite credit card fees as their third largest store-level operating expense, following labor and rent. In 2008, the convenience and petroleum retailing industry reported a pre-tax profit of $5.2 billion and $8.4 billion paid in credit card fees…Since 2001, interchange fees have tripled…Interchange fees are far higher than the actual processing costs and risks involved, yet these transactions fees continue to rise.

The GAO looked at regulatory options, but concluded:

Proposals for reducing interchange fees in the United States or other countries have included (1) setting or limiting interchange fees, (2) requiring their disclosure to consumers, (3) prohibiting card networks from imposing rules on merchants that limit their ability to steer customers away from higher-cost cards, and (4) granting antitrust waivers to allow merchants and issuers to voluntarily negotiate rates. If these measures were adopted here, merchants would benefit from lower interchange fees. Consumers would also benefit if merchants reduced prices for goods and services, but identifying such savings would be difficult. Consumers also might face higher card use costs if issuers raised other fees or interest rates to compensate for lost interchange fee income. Each of these options also presents challenges for implementation, such as determining at which rate to set, providing more information to consumers, or addressing the interests of both large and small issuers and merchants in bargaining efforts.

So merchants and consumers may be stuck with unregulated interchange fees for a while.

Credit Card Regulation Imminent

Most of the provisions of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the Credit CARD Act) are due to come into force four weeks today, on February 22. But opinion is divided on just how effective the new credit card regulation will prove.

Credit Card Companies’ Shares Down

Last Friday, ABC News reported that shares in two credit card companies tumbled when Scott Valentin, an analyst at FBR Capital Markets, predicted that the credit card market would shrink as a result of three factors, one of which was the new law. American Express shares fell 8.5 percent, while Capital One fared even worse with a 12.1 percent drop.

The ABC News report said:

During a conference call Thursday, American Express Chief Financial Officer Dan Henry noted that the regulations could lower AmEx’s yields on credit cards, which were at 9.7 percent in the latest quarter. Margins at Capital One are also expected to decline to about 15.5 percent, down from 16 percent, Valentin noted.

Credit Card Trends Uncertain

But not everyone sees credit card trends as being so clear cut. Also last week, the New York Times carried a piece questioning whether the new law would have teeth as sharp as Mr. Valentin thinks.

It pointed out that the current regulator, the Office of the Comptroller of the Currency (OCC), is on record as opposing some of the key provisions of the Credit CARD Act, and questioned just how enthusiastically it would enforce laws with which its senior officials disagree. And it quoted Travis B. Plunkett, legislative director for the Consumer Federation of America, thus: “The O.C.C. to the end fought the rules and tried to get huge exceptions, carrying water again for the large banks they were regulating. Now they have to enforce this law that they disagreed with.”

New Law Already Leaky

Back in May, when the President signed the new act, Congresswoman Carolyn B. Maloney (D-NY), wrote about the law, which she had co-authored: “This legislation, Public Law 111-24, will end the most abusive practices of the credit card industry and level the playing field between cardholders and credit card companies.”

But her optimism already seems misplaced. Since May, card issuers have found highly creative–and entirely legal–ways to generate new streams of income that are likely, at least in part, to make up for the revenues that the new law cut off.

For example, Alliance Data Systems recently announced that it would charge its customers a dollar a month for the privilege of receiving statements by mail. And, of course, many companies used the grace period between the act’s signing, and its implementation to hike rates, introduce fees, and generally change credit card terms and conditions in ways that were disadvantageous to consumers.

Nature of the Beast

Some question whether it is possible to frame laws that can effectively contain those who issue credit cards. Last July, Shailesh Mehta, who used to be chairman and CEO of Providian Financial, recorded a remarkably candid interview for PBS’s Frontline program. In it, he observed:

[Some industry people will say,] “As long as I’m in compliance with what the government says, it’s none of anybody’s business to tell me what to do.” That’s the kind of mind-set with which … some people work. … “You make the stupid laws, I’ll comply, and I’ll make money. … Tell me the rules, and then I’ll outsmart you all.” …

A New Regulator?

Whether or not it will ultimately turn out to be possible to rein in credit card companies, many in government plan to keep trying. Their latest move is to propose the creation of a Consumer Financial Protection Agency, which, they hope, can close off legislative loopholes even as issuers discover or create them. Chuck Bell, who is programs director for the Consumers Union, is an advocate for the new agency. He was quoted earlier this month as saying:

Not surprisingly, the credit card companies have been resisting and stonewalling fair consumer protections every step of the way. Many consumers are reeling from the industry’s last-minute efforts to impose drastic rate increases on balances, add new fees and penalties, and jack up minimum payment requirements, before the law went into effect. Creating a national Consumer Financial Protection Agency is the next critical step to stamp out new tricks from the credit card industry, and help millions of Americans get out of the cycle of never-ending debt.