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A law with unintended consequences

"It wasn't supposed to turn out this way." So we wrote in our November 2009 article (subscribers only) about the unintended consequences of the Credit Card Accountability Responsibility and Disclosure (CARD) Act, signed into law last year by President Obama. The law takes full effect today.

AP Personal Finance writer Eileen AJ Connelly picks up the theme:

During the past nine months [since the bill passed and before it took full effect], credit card companies jacked up interest rates, created new fees and cut credit lines. They also closed down millions of accounts. So a law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.

It wasn't supposed to be this way....

[The new law is expected to sharply] cut into future profits [for credit card issuers]. FICO Inc., the company best known for its credit scores, projects the average card will generate less than $100 a month in revenue within three years, down from $200 a month before the law.

That helps explain why the industry reacted so aggressively to the legislation.

No kidding.

"It's unprecedented that the government will come in and restrict the ability of [a company] to price the product the way they want to," Ben Woolsey, director of consumer research for CreditCards.com told the Atlanta Journal-Constitution. "But the fact that credit cards touch so many American households, the political pressure was so great that something had to be done," he said.

(Now that the precedent has been set, President Obama wants the federal government to have the authority to block insurers from making premium rate increases. Story here from today's Wall Street Journal.)

Going forward, the CARD law does offer new protections for consumers. Here is a list from the Journal-Constitution:

1. 45-day notice: Card issuers must give a 45-day notice to cardholders in advance of an interest rate change.
2. If you opt out of card changes, you have five years to pay off your balance at the existing rate.
3. Monthly statements must be mailed or delivered 21 days prior to the due date. Card issuers can no longer set a deadline before 5 p.m., cannot charge for online, phone or mailed payments unless it is made on the due date or the day before.
4. Card issuers cannot issue cards to anyone under age 21 unless they have a co-signor [sic] or can prove they are able to repay debt.
5. The pay-off period when making a minimum payment must be disclosed, along with how much would need to be paid per month to pay off the balance in 36 months.
6. Card issuers can no longer employ double-[cycle] billing.
7. Cardholders must opt-in to be able to exceed their credit limit.

CreditCards.com has additional details on how the new law is likely to affect card users.

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