Obama credit card bill could backfire

The Senate passed a measure intended to keep credit card companies from sneaking higher rates and penalties onto unsuspecting consumers. But if this bill passes into law by Memorial Day, there's a good chance that the few people who have been paying their bills on time every month will end up paying the price. In short, the bill will reward the guilty and punish the innocent.

What will this bill do? I don't know for sure since it has not yet passed the House. But the Senate version would help consumers in following ways:

  • Prohibit companies from raising interest rates on existing balances unless a card holder was 60 days behind, and then it would require the rate to be restored to its previous level if payments were on time for six months. Consumers would have to be notified of rate increases 45 days in advance. And companies could not charge a late fee if they were late processing a payment.
  • Require credit card companies to mail statements 21 days before a payment was due.
  • Make it harder for companies to issue cards to people under age 21.
  • Make it impossible for companies to increase rates within the first year.
  • Keep promotional rates in force for at least six months.

Credit card debt has increased by 25 percent in the last decade and the delinquency rate has increased by a third since 2006. This is great news for the credit card companies, which get $15 billion in penalty fees a year, accounting for about 10 percent of the industry's revenues. About 20 percent of those carrying credit card debt pay more than 20 percent in interest.

This means that people who pay their entire bill each month are -- in the view of the credit card companies -- freeloaders. So if this bill becomes law, the companies will make up the lost revenue by charging annual fees for cardholders and charging interest from the moment the cardholder pays.

If that happens, I am going to cancel all but one of my credit cards, use that one card as rarely as possible, and start paying cash or check for everything else.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.

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