Credit Card Issuers Hike Interest Rates Before New Reform Laws Can Take Affect

Credit card reform legislation that was signed into law in May of 2009 by President Obama was designed to stop the predatory practices that credit card companies have used to make billions of dollars from cardholders over the years. Chief among these practices was raising interest rates to astounding levels that exceeded 29% without any warning.

Well ironically, that very legislation is now prompting credit card issuers to do the very thing that it is supposed to stop them from doing – arbitrarily raising interest rates. For some unknown reason the legislators who drafted the reform act left a 9 month gap between one law was signed and when it would take effect which is February 2010. This is all the window of opportunity that the credit card companies needed to wring more dollars from their cardholders.

One of the very things that will be illegal when the new law takes effect is something called universal default. Universal default says that if you are late making a payment on any one of your credit cards that not only will those interest rates be raised, but all the other companies that you have credit cards with can also raise your rates through the roof. They justify this by saying that you are an increased credit risk.

Now that many credit card companies are facing record defaults and uncertain futures they are scrambling to see how they can raise as much revenue as possible from their account holders before the new laws take effect. The Sprint is on the finish line is February 2010.

Citigroup is a prime example of what is going on now. They along with Bank of America aggressively issued credit cards to just about anyone that had a pulse in order to build a customer base. The net effect of that is that they are facing record charge-offs because the issued so many cards to people with subprime credit histories who are now, surprise, surprise, defaulting on their payments. Citigroup recently announced that they will be raising interest rates on 15 million of their cardholders. Even the ones that have always paid on time.

Bank of America went so far as to actually issue credit cards to illegal aliens. They too are now facing an uncertain future as unemployment rises and credit tightens. Both Bank of America and Citigroup wrer also the recipients of over $40 billion each in government bailout money. So on top of the fact that they are facing a future of tighter profit margins due to credit card reform, they also owe the taxpayers billions of dollars.

So now that we understand the motivation of the credit card issuers, it begs the question, how could our politicians not see this coming from a mile away and what you have to say for themselves now?

Rep. Carolyn Maloney (D- N.Y.) was one of the chief architects of the legislation in the House of Representatives. Maloney made the statement that it was unfair of the credit card companies to be raising interest rates on those who play by the rules and pay their bills on time. She went on to say that the legislation that goes into effect in February 2010 was designed to stop these very practices and the credit card companies that are now arbitrarily raising rates in front of that deadline should stop immediately.

Maloney’s counterpart in the Senate, Sen. Charles Schumer (D- N.Y.) added that he has made a request of the Federal Reserve Board that they limit any interest rate hikes between now and February of 2010. That timeline is directly proportional to when the new laws will go into effect and Schumer is hoping that by keeping interest rates low that the credit card companies won’t be able to gouge their account holders too much. Good luck on that one.

It remains to be seen if lawmakers will be able to do anything at all to control the credit card companies prior to the reform legislation taking effect. As a longtime observer of Washington I don’t put too much stock in their ability to do much of anything. A damning statement yes, but I’m afraid it’s based on reality.

Related Information:

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