$50 Billion in New Credit Card Fees? Lenders React to CARD Act

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Last year, a new law went into effect that's intended to improve the lives of everyone who uses credit cards. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit CARD Act) limits the rate that credit card companies can charge you in fees and penalties, and restricts the ways in which they can raise interest rates. But the Act is having unintended -- if unsurprising -- consequences: According to The Wall Street Journal, it's driving those companies to find new fees to charge you to offset the $50 billion in revenues they'll lose due to the consumer-friendly restrictions.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% The Wall Street Journal notes that next month, new rules will go into effect as part of the Credit CARD Act that will "limit some interest rate increases, require more disclosure to customers and prohibit banks from raising interest rates on current balances unless a customer is at least 60 days behind in a payment."

How much will these changes cost credit card companies? It's unclear how The Journal's reporter arrived at the $50 billion in lost revenues, though it does quote Robert Hammer, CEO of credit card consulting firm R.K. Hammer, who said that in 2009, credit card companies charged $22.9 billion in penalty fees, such as those associated with late payments. The Journal also reports that in 2011, the Fed will require banks to receive customer consent before charging overdraft fees -- which now yield $25 billion to $38 billion in bank fees annually.

The Journal cites five specific ways that credit card companies will attempt to generate new fees:
  • Introducing a new processing fee. Before February, when the new law goes into effect, credit card Issuers are closing accounts, switching cards with fixed interest rates to variable rates and introducing cards that have annual fees. But they are also adding entirely new fees. One example is sporting-goods chain Gander Mountain (GMTN), which now charges customers a $1 processing fee for each paper account statement they receive. The company that issues Ganders' credit cards claims the fee is necessary due to higher paper, production and postal expenses linked to the Credit CARD Act, which requires that issuers add information to statements pertaining to the cardholder's terms and conditions.
  • Reducing the value of rewards programs. Issuers will reduce the payoffs for their rewards programs.
  • Adding a new inactive account fee. Issuers will also introduce new fees for inactive accounts.
  • Encouraging more use of debit cards. Banks are promoting greater use of debit cards, which can be more profitable for banks than processing paper checks.
  • Creating new types of checking accounts. For example, BBVA Compass, a regional bank with 748 branches, will promote its "Build to Order" account. With Build to Order, customers pick account options such as receiving interest on checking, no minimum-balance requirements or free usage of other banks' ATMs. While the first two options chosen are free, customers pay $2 a month for each additional feature.
I think The Wall Street Journal has a political agenda for this article. I'm guessing that its subtext is to fuel anti-incumbent anger as the 2010 elections approach -- somehow transferring public frustration with credit card companies onto Democratic members of Congress.

What can you do about these new fees? Two obvious things: First, be aware of precisely what new rules are being introduced on your accounts -- read the fine print that credit card companies send you instead of throwing away their mailings. Second, avoid doing the things that would trigger the fees.

I know it's easier said than done, but if you aren't careful, your loss will be the credit card companies' gain.
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