Credit Card Companies Cheer New Regulation?

The Federal Reserve Board wants credit card companies to clean up their act, and the credit card companies couldn’t be happier. The Fed’s proposed regulation would give customers 45 days notice before a change to their card’s terms, require fees and interest to be shown separately on each bill, and would transform default APR into the more menacing-sounding penalty APR. None of this is objectionable to the credit card companies:

“We strongly agree that improved disclosures empower consumers to make better choices in our competitive marketplace,” said Edward Yingling, head of the American Bankers Association, a lobbying group that represents the biggest credit-card issuers.

We tell you why creditors are grinning, after the jump…


Congress can’t wait to throw the credit cards companies across its knee and deliver a well-deserved legislative spanking. The creditors will gladly accept the Fed’s proposal if it will help them brand legislation introduced by Senator Carl Levin (D-MI) as unnecessary. The Levin bill, S. 1395, would: “bar companies from charging interest on debt paid by the due date, cap penalty interest-rate increases, prohibit interest from being charged on late fees or over-the-limit fees and prohibit late fees if a card-issuer delays crediting a payment.”

We have an easy solution: the Fed should adopt the proposed regulation and Congress should pass Senator Levin’s legislation. See, wasn’t that easy? — CAREY GREENBERG-BERGER

Fed Plans to Revise Credit Card Rules [Washington Post]
Board issues proposed amendments to Regulation Z [Federal Reserve Board]
Electronic Comment Form – proposed amendments to Regulation Z
S. 1395 [THOMAS]
Write Your Senator

Comments

Edit Your Comment

  1. Crazytree says:

    The Levin Bill may be BAD news for those of us who are able to take advantage of the CC companies. All those 0% promo BT’s [balance transfers] with fees waived may be a thing of the past.

  2. mikyrok says:

    As a person with no credit card debt, I would actually prefer that the Levin Bill does not get passed. I mean I cant argue with the 3% back that I’m getting on most of my purchases.

  3. TPK says:

    I read through the text of the bill here, and while I didn’t chase down every reference (this would take hours) I didn’t see anything obvious that would affect either a 0% introductory rate, or affinity perks, including cash back. Did I miss something?

    I did see one thing that is way cool: the bill will require credit card companies to apply payments to the highest interest balance first rather than last.

    That means that you would actually be able to use that 0% balance card for regular purchases at the same time you were investing the free loan balance transfer in a high-yield savings account! Oh they will not like that one bit!

  4. matdevdug says:

    I did read the bill or at least as much of it as I could understand and TPK is correct in that this bill would not ban reward systems as we understand them today.

    I also loved the part that would require credit card companies to apply payments to the highest interest balance first rather than last as well.

    Personally I think America needs a lot of protection against credit card companies because we are unable to protect ourselves. Most people just don’t understand enough about the whole credit card business before they run up enough debt to drown out their lives for decades. We are a population that had more debt than we know what to do with and cannot pay it off. Its time to start demanding protections from the government because we cannot protect ourselves.

  5. endless says:

    Its not a direct death of the current rewards system, but I think what Mikey was implying was:


    If the credit card companies no longer can rape stupid people, it no longer is beneficial for them to have such good promos to lure them in.

    yes they are giving you 0% and 3% percent back, but where do you think they are getting the money? from those suckers paying 18% intrest.

  6. lore says:

    @TPK: I think the indirect impact of a bill like this is that credit card companies will have less net income to work with, and therefore have less reason to offer 0% BTs or cash back and “loyalty” rewards to their customers.

    Or did I miss a point somewhere?

  7. Crazytree says:

    @TPK: the bill will make balance “carriers” less profitable, and hence the 3% back, 0% promos may dry up.

  8. quantum-shaman says:

    @Crazytree: I find that really hard to believe. What could possibly be more profitable than an industry that is essentially in the “money creation” business? They could give you 15% back and still make a killing.

  9. I have now heard the dumbest reason I’ve EVER heard to not regulate a predatory industry: Because they might stop offering semi-good deals to the people they’re not outright raping. I think that honestly takes the definition of “narrow-minded” to a whole new level. Do people getting 0% APR think for some reason that the CC companies aren’t intending to rape them too, the second they get a chance? Do we wish to see them continue to be allowed to? In any case, banks are companies and just like any other company, they’ll do what they have to do to pull in business. Preventing them from scamming people isn’t going to make the market any friendlier overall, I think; sales and deals should still be necessary. (And it’s not like they’re soooo hurting for cash that they can’t afford it!)

    Levin’s bill is t3h awesome, even if I’m not sure it’s enough at this point to reverse the tide of people who have no savings and horrific financial problems due to this industry. There’s also a proposal out there to ban the practice of hiking your credit card rate if you’re late paying anything else in the whole world (phone bill, car payment, anything at all) — that’s just B.S. and needs to go!

  10. MeOhMy says:

    Personally I think America needs a lot of protection against credit card companies because we are unable to protect ourselves. Most people just don’t understand enough about the whole credit card business before they run up enough debt to drown out their lives for decades. We are a population that had more debt than we know what to do with and cannot pay it off. Its time to start demanding protections from the government because we cannot protect ourselves.

    That’s a frightening statement. Are so many Americans completely devoid of personal responsibility that they need to be protected from credit card companies? What does one need to understand about the credit card business? It’s dead simple – don’t spend money you don’t have and you won’t be over the barrel. Sure, you sometimes get in a bind and have to use a credit card as a stopgap measure, but what about the legions of other morons who feel they “deserve” the giant house, 5 giant plasma screens, etc?

    A law that somehow makes it illegal to be a “Me too!” consumer whore would be more useful.

    That said, the credit card companies should still have to play fair. Since they cannot be trusted to regulate themselves, I’m OK with putting them back in their place.

  11. MatthewVA says:

    There’s one fee that is missing from the chart and its a $30 billion a year money-maker for Visa and Mastercard. The interchange fee is the biggest credit card fee you’ve never heard of; the card issuers love it. It costs the average family about $300 a year! $300 would buy a lot of gas even with prices as high as they are.

    Although this fee is not charged directly to consumers, retailers will often pass the cost onto consumers but nobody seems to know about it, which is why we at the Merchants Payment Coalition are fighting for increased transparency. More info is available at http://www.unfaircreditcardfees.com

  12. mikyrok says:

    @endless: exactly.

  13. mikyrok says:

    @quantum-shaman: What the hell are you talking about.

    Lets pretend that we live in a world where no one carries credit card debt (i.e. no one is getting raped by 18% interest on their overdue balances). In this world a credit card business would ALWAYS work in the red unless they charged fees. In a perfect world a credit card company is not a profitable business because they are essentially giving out 0% interest 1 month loans, potentially -1%, -3%, or -5% 1 month loans if you include cash back (yes I know those estimates are incorrect because normally you can’t collect on cash back for a long time after the month of purchase, but you get the point).

    If it wasn’t for idiots spending more than they earn and in turn falling into debt paying 18% interest on their formally 0% interest loans that they defaulted on then it would be necessary for credit card companies to charge fees just to break even. Forget rewards and cash back. This is why (in my interest, not in the interest of the general public) I am against any regulation of credit card companies to limit how much they can make off of delinquents.

  14. If it wasn’t for idiots spending more than they earn and in turn falling into debt

    Wow.

    That’s awesome, when people say shit like that.

    I’m not in debt, but I know people who are. They aren’t idiots.

  15. rhombopteryx says:

    @mikeyrock:

    No, what are you talking about? ;)

    You say, roughly, that if not for interest payments, CC companies would have to charge fees to break even.

    It turns out that’s exactly what they do… Every CC transaction you make with a merchant results in a 1-5% fee charged to the merchant for handling the transaction. That’s one of the reasons why merchants prefer debit transactions.

  16. enm4r says:

    @loquaciousmusic: They might not be idiots, but every month some of that interest they’re paying is landing in my pocket via cash back/rewards.

    I’m with mikeyrock on this one, extreme regulation is not the answer. The protection some of you are talking about is already present in the market today…it’s called not using credit. We can protect ourselves, by not spending money we don’t have, and paying down debts.

  17. MeOhMy says:

    @rhombopteryx:

    Every CC transaction you make with a merchant results in a 1-5% fee charged to the merchant for handling the transaction.

    This is why I reject the idea that the card issuers consider people who keep a zero balance to be “deadbeats.” They make money every time I run my card. I’m not giving them any extra handouts. That’s not being a deadbeat, that’s being a smart consumer.

    I’m guessing that’s also why, a few weeks ago when I was at my butcher, the total came to $15.12 and all I had was $15. When I pulled out my credit card he said “I’ll take the $15 – you can pay me the 12 cents next time.” Even if he never gets the 12 cents, it still cost him less than the fee for running my credit card.

  18. dwneylonsr says:

    18%??? 18% is good from my viewpoint. My credit rating tanked after being out of work for two years and I’m just rebuilding it. I consistently get offers at 25% and higher.

  19. quantum-shaman says:

    @mikeyrock: I figured you’d miss it. Here’s what the hell I’m talking about:

    When you charge something on a credit card, where does the money come from? The answer is, of course nowhere. Your transaction CREATED not only the principal, but the interest, and the credit card company gets to collect both. Think about that for 3 seconds. Plus they also collect a bunch of fees and even higher rates, should you be so unlucky as to make a late payment. That’s why any 3% “rebate” is a joke.

    So yeah, the credit card companies’ very existence is based on the fact that the majority users will carry balances. But the 18% rates are merely adding insult to injury, because they are also collecting 100% of the principal which you just created with your transaction. NOW do you get it?

    In other words, their profit margins aren’t nearly as narrow as you imagine.

  20. MarieBee says:

    The interchange fees (the 2-5% the merchant pays)don’t go to the card issuers, they go to bankcard, as well as the agents that work for bankcard. This money is used to update and build the network of credit card processors, as well as make money for the people who set up these accounts, not the card issuers. The infrastructure required to transfer the money in a matter of seconds is huge. I was in the bankcard processing industry for 5 years. You would be amazed by how many people have their hands on the fractions of cents each time a cc is run.

  21. Tonguetied says:

    @quantum-shaman:
    Yes the credit card companies are collecting the principal but then they turn around and then pay the principal (less 1% I believe) back to the store where you made the purchase…

  22. drezdn says:

    One of the things that’s been annoying me with CCs (and some other companies who allow online payments) is their new trick of deciding you need a new password on your account and that they’re going to send it to you.

    Fortunately, I’ve always been able to get it changed in time, but it’s for this sort of thing to lead to being blocked out of your normal payment method.

  23. quantum-shaman says:

    @Tonguetied: Of course. I’m merely trying to point out the fundamental economics of “credit”. A couple of other thoughts:

    (1) “Credit” is not a part of the money supply, yet it makes up more than half of the economy in terms of transactions made. (I don’t know what “more than half” means and haven’t been able to find a percentage figure).

    (2) In addition to the fees paid directly by consumers, the banks/credit card companies have “hidden fees” which must be paid by the retailer. Guess what, if the retailer is paying them, that means YOU are paying them because they are going to either pass the buck, or go out of business.

    http://leahy.senate.gov/press/200607/071906.html

  24. mac-phisto says:

    ok, i’ve been trying to hold my tongue, but i have to straighten something out here.

    interchange fees = extortion payments. yes, that is true, HOWEVER, they are meant to offset losses incurred by chargebacks, fraudulent cards, etc.

    i’m sure card issuers would absolutely LOVE the opportunity to create a system where there are no interchange fees. of course, merchants would NOT receive the protections they receive now. perhaps they would rather eat the BILLIONS of dollars of fraud from approval of fraudulent cards or customer-disputed transactions. perhaps they would rather represent themselves in an arbitration case against a team of bank lawyers, instead of having a merchant-friendly conglomerate represent them in an independent resolution system that favors merchants.

    i dunno. what do you think?

  25. fluxtatic says:

    Regarding CCs & merchants:

    First, interchange fees are a rip, as it is a percentage of the transaction and depending on your specific setup, sometimes a flat per-transaction fee as well. (And with debit cards, it is almost always both – why do you think McDonald’s hits you up for $.50 for debit transactions?)

    Also, having worked in retail accounting, I know there is at least on CC that consistently sends in disputes of transactions. The only verification is the customer’s signature on the slip. Being way overworked already, there’s no way the accounting department has time to pull out ~200 individual slips a month to ‘prove’ the transactions are legit. No proof? The merchant eats the fee.

    The point is, without regulation, the companies (any company) is going to do whatever falls within the boundary of the law to make a profit. If it wasn’t specifically illegal and MC or Visa thought there was money to be made, I guarantee they wouldn’t think twice about killing and roasting babies.

  26. mac-phisto says:

    @fluxtatic: mcdonald’s doesn’t hit you up for using a debit card. that’s your bank charging you for a PINned transaction. this is a hotly debated topic recently b/c some banks are incorporating the fee into the purchase amount which some state regulators say amounts to fraud. merchants actually prefer debit over credit b/c the interchange fees are MUCH less than thru the comparable CC interchanges & cap out around 80 cents.

    actually, there are 3 verification requirements – card present, user present, approval obtained. the signature proves that the user was present, but guess what – that signature doesn’t even have to match the customer’s actual signature. furthermore, transactions under a merchant’s floor limit are indisputable. that’s why a lot of places will let you use a card w/o signing anything these days (such as fast food restaurants up to $25 or $50, i forget which).

    i’m not sure which retail store you worked for, but everywhere i’ve worked that processed card payments (3 retails & 2 restaurants), the responsibility of pulling receipts was generally up to the individual store manager. & if they weren’t able to “prove” the transaction, the cost came out of their bonus, so they were usually pretty vigilant about that.

    plus, electronic signature pads now make pulling “proof” as easy as entering a transaction reference # into a computer terminal.


  27. Almost every company is try to have it own credit card rewards program, so they use a card which gives them some incentive to use it.

    Best Credit Card Rewards Poll: [polls.hopto.org]