By July 2010, credit card companies will have to play by a new set of rules. This new set of Fed regulations will curb abusive credit card practices and will fuel transparency within the credit card industry, thereby making it easier for consumers to understand the real costs of a credit card. Specifically, one of the new rules that will take effect in July will prohibit credit card companies from raising the interest rates on existing balances for consumers that pay on time.
On May 4th, the Federal Reserve rejected a request by Senators Schumer and Dodd that would force credit card companies to immediately halt interest rate increases on existing balances. “We believe that issuers must be afforded sufficient time for implementation to allow for an orderly transition process that avoids unintended consequences, compliance difficulties and potential liabilities,” Fed Chairman Ben Bernanke wrote in a May 4 letter.
While this is perhaps not the most popular position to take on the issue, the Fed seems to have done the right thing in denying the immediate halt of interest rate hikes. We live in a political and economic climate in which we inherently perceive banks and credit card companies as being the “bad guys” – and the media only perpetuates that stereotype. In some ways they’ve earned their image, but the truth is that we find ourselves in economic disarray not only because of the bad decisions that the banks made, but also due to the poor choices made by regulators, politicians, and even some of our own friends and neighbors.
The credit card companies developed their tactics in line with the rules put in place by regulators and politicians – it is not their fault that politicians and regulators were asleep at the post. Demanding that credit card companies immediately comply with a new set of regulations will add stress to financial institutions whose very survival is tenuous at best at the moment.
At the end of the day, the money that will make our financial system strong again has to come from somewhere. It is not as if the banks are sitting on excess cash that they do not know what to do with. If the credit card companies aren’t given the time between now and July 2010 to recoup some of their losses by continuing to use their current set of practices, we can expect that these companies will require even more taxpayer assistance or will pose a systemic risk to our economy. I think we will all agree that taxpayers have already contributed enough.