Saturday, May 12, 2012

Credit Card Changes Wreaking Havoc

An early victory for the Obama administration in 2009 was the passage of the Credit Card Accountability, Responsibility and Disclosure Act (CARD) in May. The Act seeks to improve consumer protection in the credit market by limiting what credit card companies can do in the event of consumer default; limiting interest rate hikes; changing rules on late fees; and requiring companies to offer consumers more information about their long-term balances.

Credit card companies, however, are not sitting back and waiting for the new consumer-centered laws to take effect. They are taking active steps to do what they can to thwart the new laws slated to go into effect in early 2010.

Changing Interest Rates

Credit card companies have begun raising interest rates for those who are carrying the largest balances on their cards. Creditors argue that higher interest rates are necessary for riskier debtors who may face unemployment in a down market. Such rake hikes, however, actually seem to cause some debtors to miss payments. Another tactic that credit card companies have used is increasing the minimum payments to reflect a higher percentage of the balance due.

Due in part to the credit card companies' actions, personal bankruptcies have risen almost 10 percent just this past October. A significant portion of the responsibility lies with credit card companies' interest rates, some of which reach 30 percent. Many people hope to get into a debt-relief plan with a credit counselor or cut a deal with a creditor before having to file bankruptcy; for some, however, bankruptcy has become inevitable. Successful bargaining with a credit card company is becoming less likely as creditors deal with new regulations. They have become increasingly less likely to take on risks and less receptive to pleas over the phone.

Small Businesses Are Also Affected

How will small businesses be affected by such policies on credit? Ironically, the credit card rate hikes that are coming swiftly before the dawn of the new year will disproportionately affect those with excellent credit scores. Many businesses fall into this category. Those who have good credit scores may get rate hikes as credit companies make a desperate last-minute attempt to capitalize on the recession and the holiday shopping. Businesses can choose to do away with credit cards they do not use or choose to switch to other loan instruments.

The Bottom Line

Businesses, as well as consumers, are better off waiting until the new regulations take effect before opening new credit card accounts. Those who are considering bankruptcy now, however, should contact an attorney to review their options.

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