Will New Law Make Credit Cards More Expensive?


Ever since the extent of this economic crisis became clear, Washington politicians have been informing us that keeping a torrent of credit flowing to consumers and businesses justifies government bailouts and other extraordinary measures.

President Obama recently pledged to "focus on restoring the flow of credit that is the lifeblood of a growing global economy." House Majority Leader Steny Hoyer, a Democrat, said during the debate over last fall's TARP bailout that, without it, "credit, the lifeblood of any economy, might dry up across America." And the Treasury Department claims to be ensuring that credit is "flowing again to entrepreneurs and business owners."

Yet Mr. Obama signed legislation this afternoon that levies a slew of new regulations on credit card companies -- which lenders say will actually reduce the availability of credit. That's from no less an authority than American Express CEO Kenneth Chenault, who said his concern is with "credit being available, particularly to consumers who need it," according to Bloomberg.

Which, if you've been following along so far, is exactly the opposite of what Mr. Obama and his political allies say they wanted to achieve.

"Over the past decade, credit card debt has increased by 25 percent in our country," Obama said when signing the Credit Card Act of 2009. "Nearly half of all Americans carry a balance on their cards. Those who do, carry an average balance of more than $7,000. And as our economic situation worsened -- and many defaulted on their debt as a result of a lost job, for example -- a vicious cycle ensued. Borrowers couldn't pay their bills, and so lenders raised rates. As rates went up, more borrowers couldn't pay."

It's true that the measure the president signed isn't an anti-usury law; it doesn't explicitly prohibit annual interest rates that exceed, say, 25 percent.

What it does do: Bans so-called universal default, which meant that a default on one loan might raise rates for others. Restricts introductory "teaser" rates and immediate rate hikes. Limits what credit cards college students can receive. Requires more disclosure about interest rates and the consequences of late payments. Mandates that consumers must approve transactions that exceed credit limits.

All that adds up to reduced revenue for credit card companies, meaning that banks now expect to issue fewer cards, reduce benefits, or charge more fees. As a CBSNews.com article last month noted: "That could mean a return to annual fees or less generous promotions that give cash back, hotel points, or airline miles in return for spending money.

"To now pressure credit card companies not to raise their fees or more accurately price credit risk, will only reduce the availability of credit while undermining the financial viability of the companies, ultimately prolonging the recession and potentially increasing the cost of bank bailouts to the taxpayer," says Mark Calabria, director of financial regulation studies at the free-market Cato Institute.

Neither Washington politicians nor the credit card industry seems to want to admit this uncomfortable truth: Too many people were extended credit who shouldn't have received it. Too many people ran up too many credit card bills they couldn't afford. Banks, consumers, and Washington officials alike confused the housing bubble, the credit bubble, and the stock market bubble with normal economic conditions.

But now that unemployment is rising and Americans are falling behind on credit card payments, banks have been tightening the screws to avoid being hurt more by defaults.

As the banks argue, the legislation that Mr. Obama signed today will probably make credit somewhat more expensive and difficult to obtain. On the other hand, Federal Reserve data show that Americans are saving more than during any time in recent memory. So even if credit cards become less attractive, it may not matter quite as much as it would have a few years ago.

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    Declan McCullagh is the chief political correspondent for CNET. You can e-mail him or follow him on Twitter as declanm. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.