How Will Credit Card Issuers Respond to New Regulations?

This is a guest post by Bill Hardekopf, CEO of LowCards.com.

Major credit card reform is now making its way to President Obama’s desk for his signature. New regulations include putting restrictions on interest rate increases, giving greater notification about changes in your credit card, requiring payments be applied to the balance with the highest interest rates and curtailing the over-the-limit fees.

These regulations will dramatically reduce the ways banks and issuers earn revenue. But this law will not go into effect for nine months or the end of February 2010 at the earliest.

How will issuers respond to these new regulations to make up the shortfall in their revenue?

• Expect more increases in credit card interest rates. When the new regulations take effect, issuers cannot raise rates on a new customer for one year. So the introductory interest rates will likely be increased before February. But consumers are also likely to see interest increases in their existing accounts during this period.

“Issuers do not have any of these restrictions in place for nine months so we think they will continue to implement the policies that are currently in place. Expect issuers to quickly increase your APR if you do anything to show that you are a greater credit risk,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “They still have the ability to raise your interest rates at any time for any reason. If you miss a payment, are late on a payment, exceed your credit limit or even use too much of your credit limit, you could see an increase in your interest rate the very next billing period. Consumers need to get their credit card bills in early, pay more than the minimum amount and not use more than one-third of their credit limit.”

• A cutback in rewards and cash rebates. That has already been taking place since the start of 2009 and will likely continue through the year. Pay attention to your rewards by looking at the terms and conditions of your card. Issuers can make subtle changes in the reward program that are hard to spot, like changing a tier needed to reach a certain payout or requiring purchases over a longer period. Maximize the points you have and use them sooner rather than later because these could also be reduced. American Express recently notified cardholders that it is reducing its rewards for the Blue Cash card on spending over $6500 from 1.5% to 1.25%. (Note: see a number of changes made by credit card issuers in 2009 here

• More cards with annual fees. “Approximately 20% of the credit cards have an annual fee at this time, but we expect that number to go up in the next year,” says Hardekopf.

• An increase in fees. While the regulations address the over-the-limit fees assessed on credit cards, they do not put any restrictions on fees for balance transfer, cash advance or late payments. This is already taking place as Bank of America and Discover announced that balance transfer fees will increase from 3% to 4% on June 1. Other issuers could follow.

All of these changes stress the importance for consumers to shop around for the best credit card.

“We do not expect all cards to assess an annual fee, cut back their rewards and increase their interest rate and fees. The competitive nature of the credit card industry will keep some of these changes in check. There will still be good credit cards out there. Consumers will need to be diligent in searching for a good card,” says Hardekopf.

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LowCards.com simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for all 1260 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for eight years.