Credit Card Companies Feeling The Heat

Credit card legislation has just passed the Senate: good news for consumers, bad news for credit card companies.

The Senate has approved a credit card bill that would curb sudden increases in credit card interest rates.

Among other things, it would prohibit issuers from raising interest and fees on existing balances unless the borrower is 60 days past due; they would have to provide 45 days notice and an explanation before interest rates are increased.

This comes at an ugly time for card companies. Credit card fundamentals are still deteriorating, specifically loss rates (over 9 percent now) are still rising.

Unemployment and credit card delinquency are highly correlated, so this number will go up--some are expecting losses to exceed 12 percent.

The new rules introduce "regulatory risk" for card companies. Our Bertha Coombs has noted that industry consultant RK Hammer sees the new rules resulting in a 10 percent decline in industry revenues next year.

He says card issuers will need to boost charges like annual fees to make up a bigger slice of the pie.

The American Bankers Association said that "this bill fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk," because it turns short-term lending into medium-term lending, which is significantly more risky.

Credit card companies like American Express, Capital One, and Discovery are down 3 percent.


Elsewhere, the dollar is getting hit bad, as Brazil's leader is having a meeting with Chinese officials where they are discussing a plan to abandon the dollar.



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