Here's what's happening: The American Bankers Association -- a lobbying group for banks -- is trying to convince America that credit card reform is unfair and that if President Barack Obama signs the bill, card issuers won't be able to properly price the risk it takes on. (Banks charge consumers different interest rates and slaps them with fees based on their credit score and their payment history. At face value, this seems fair enough. After all, consumers don't always pay their bills on time and some do regularly go into default.)
But should President Obama sign the bill -- as he's expected to do before Memorial Day -- card issuers claim they may have no choice but to limit credit at a time when consumers need it most. The banks may also raise fees for their "deadbeat" borrowers (get this - the nickname is reserved for the roughly 50 million people who pay off their balances in full each month) to make up for the lost income from their riskier card holders who they won't be able to bilk anymore.
I have to admit that the American Bankers Association almost had me there for a moment. I was nearly convinced that credit card reform had some dark and inevitable consequences. But then I read Consumers Union's Gail Hillebrand's comments in The New York Times and now realize that the banks are just really good and shameless marketers.
While the legislation will prohibit some billing practices, such as raising interest rates on anyone less than 60 days late on a payment, or giving less than 45 days notice on rate hikes, Consumers Union's Hillebrand points out that:
"The legislation doesn't restrict how much the banks can charge. It only restricts when the bank has to decide how much to charge." This sounds to me like the banks can price for risk, after all.
And as I mentioned in a previous blog, credit card reform won't go into practice for a number of months. So industrious bankers have plenty of time to raise everyone's interest rates as much as they want -- or feel they need -- to properly adjust for risk.
So do the banks really need to charge their so-called "deadbeat" borrowers punitive fees to cover losses they may suffer from delinquent borrowers. I don't think so. But as long as the American Bankers Association keeps pushing this line of argument, enough people will buy it, no one will complain too loudly, and the fees will stick.
What should the 50 million of us "deadbeats" do (you know, those of us who don't put the banks at risk at all)? Forget your airline miles and other rewards and opt for your debit card instead. That is, of course, until the banks catch on and start ratcheting up the fees on those too.
Credit Cards image by thetruthabout, CC 2.0.