Experts Were Wrong About Credit Card Reform

(MoneyWatch) 
When credit card reforms were passed almost exactly a month ago, banks warned that that even people with good credit would suffer. Interest rates would rise; credit card offers would evaporate; credit limits would fall; fees would soar. And consumer reporters and pundits, myself included, reiterated the dire projections and told consumers to brace themselves.
What's happened in the past month? Well, one of my credit card companies unilaterally lowered my rate. And, last week, I got three offers for new credit cards in the mail. Has anyone raised my rates? Hiked my fees? Lowered my credit limits? Uhm, no. And I don't actually think I'm special. In other words, I think other consumers who have been responsible with their bills are having a similar experience.

What's going on? Well, it seems as if the competition for good credit risks is just as vibrant as ever. In fact, because banks are going to be reluctant to lend to bad risks, those of us who have proven to be good risk are likely to be courted like never before. It's a supply and demand world, after all. There are just as many issuers of credit as before, but less consumers worthy of getting credit.

Yes, banks will have to be honest with their customers. They won't be able to unilaterally hike rates without warning and apply that higher rate to an existing balance. They'll need to mail your bill with enough notice that you can pay it on time, if you're prompt. And they won't be able to impose an arbitrary cut-off time to process payments--like noon--so that they can make you late even when you paid on time.

In other words, they'll have to play fair. Oddly enough, while banks really prefer Calvinball (and don't we all), they seem to be acclimating okay to playing by rules that pretty much everybody would consider fair. And, while they're not going to be able to earn fees with trick and traps, they can charge insanely high interest rates. The average credit card rate is over 14%, according to IndexCreditCards.com. Given that banks are paying about 2%--tops--for deposits, that's a 12% profit margin. Not half bad.

Of course, "deadbeats" like me never pay interest because we pay our balances in full each month. Only about half of credit card consumers pay interest at all. But banks still want my business because they earn so-called "interchange" fees. Every time I make a charge, they hit the hapless merchant with a fee for 2% to 3% of the purchase price--a practice that doesn't exactly endear them to merchants. That makes my business profitable, even when I'm not paying interest or fees.

So what's the real impact of credit card reform? People who have dicey credit histories are going to have fewer choices and be forced to pay higher rates. Maybe they won't get credit at all.

Is this disaster? Not in my opinion. I consider the fast-and-easy credit of years gone by the equivalent of banks giving consumers enough rope to hang themselves. Unfortunately, irresponsible consumers went down in masse and took the economy with them. We are all now suffering the consequences.