How the Banks See the Impact of Credit Card Reform

The Federal Reserve did something very interesting recently. They conducted a poll of banks in the U.S. to specifically ask them how the new Credit Card Reform Act would affect the way they do business going forward for both new and existing customers.

In many cases the answers were predictable, while in a few instances they were somewhat surprising. Right of the bat, and we’ve seen this already from many issuers, they stated that they would raise interest rates, reduce credit limits and tighten requirements for approvals on new accounts.

It’s no secret that banks and credit card issuers are scrambling to find new ways to generate profits. The credit card business once was a cash cow sent from heaven for these companies. Oh how times have changed.

We now find ourselves with unemployment in the double digits for the first time in 26 years – 10.2% nationally as of last weeks jobs report. Unemployment and credit cards are like oil and water. When the jobless numbers rise so to do the number of defaults and we’re seeing that at a record pace.

When you couple that along with the horrible economy, new regulations aimed at protecting consumers and a nation that is growing increasingly adverse to debt and you can see why this is an industry at a crossroads.

The full provisions of credit card reform are not scheduled to go into effect until February 2010. There is movement in Congress however that would move them up to December 1, 2009. Some legislators called for them to go into effect immediately but that’s not going to happen.

Perhaps it’s a stalling tactic, which certainly wouldn’t surprise us, but 75% of the banks polled said they didn’t expect to be fully compliant with all of the provisions of the new legislation until February 2010.

All in all it’s pretty simple to understand what’s going to happen with bank credit cards; Interest rates are going to go up, credit limits are going to go down and applicant’s are going to have to have higher credit scores in order to be approved for the prime offers.

After all of the provisions fully take effect the credit card issuers will have a much clearer picture of what the business landscape looks like. Until then, this is all unchartered waters so it looks like it’s going to be some rough seas ahead.

Related Information:

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