After millions of borrowers learned the hard way how credit cards work, change has come. Back in May, a bill was signed into law intending to protect consumers from the dark, ugly world of borrowing money at high interest rates.
One of the big changes limits when interest rates can be hiked, and whom those hikes can be levied on. But that rule doesn't go into effect until next February. Some worry that between now and then, banks will rush to jack up credit card interest rates. One last hurrah before the Feds come marching in.
Earlier this week, Bank of America (NYSE:BAC) went out of its way to let politicians know it's all good in the 'hood. In a letter to Rep. Barney Frank, Bank of America wrote: "In light of the concerns expressed to us by our customers, Bank of America will not implement any change in terms (risk or economic based) re-pricing of consumer credit card accounts between now and the effective date of the CARD Act."
Meanwhile, Wells Fargo (NYSE:WFC) isn't rolling over that easy. It's raising the interest rate on most of its cards by three percentage points, February rules be damned.
Not surprisingly, that got people fired up. As Rep. Betsy Markey recently said, "The implementation of these necessary reforms should not be taken as an indication that the industry should take advantage of consumers now before the prohibitions come into effect."
Easy there
I agree that the credit card industry needs serious reform. But asking for what's effectively a moratorium on pricing risk might be one of the worst ideas I've ever heard.
Consider this: Bank of America just announced that its credit card default rate hit 14.54% in August. Weeks later, the U.S. Treasury released its quarterly mortgage report. The report shows that the "seriously delinquent" rate on subprime mortgages is now 17.8%.
Think about that: Subprime mortgages -- a product not available anymore because everyone knows they're a disaster -- are failing at a rate not much higher than Bank of America's credit card portfolio.
Point being, banks need to raise credit card interest rates to offset surging losses.
The only reason banks haven't shut down the credit card market completely (like they did with subprime) is because consumers can tolerate the exorbitant interest rates banks then use to counteract losses.
Take that ability away, and one of two things will happen:
- The industry as a whole will end up like Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE), Citigroup (NYSE:C), and AIG (NYSE:AIG): underpricing risk until the house of cards collapses.
- Creditworthy customers willing to pay high interest rates will have their lines retracted. Indeed, Wells Fargo said it was raising interest rates because it "just reached the point that we don't think we can offer credit cards at the current pricing and keep credit flowing."
Bottom line
The credit card industry is a mess. It needs a good regulatory overhaul. But pressuring banks to not price risk as they see fit is walking on thin ice.
Besides, that same pressure -- regulations encouraging lenders to keep prices suppressed -- is part of what got us here in the first place, you know.
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