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Week of 11.13.09

The Bankers' Turn: On Credit Cards

Peter Garuccio Peter E. Garuccio of the American Bankers Association defends credit card company practices and discusses whether journalists are covering the industry fairly.

NOW: Credit card holders are facing higher interest rates, credit lines are being cut and a variety of new fees are being added. Are these measures really necessary?

Peter Garuccio (PG): Interest rates are up primarily due to the impact from the sagging economy. Losses in the credit card space track historically with unemployment. With unemployment hovering around 10%, it is no surprise that the charge-off rate (i.e. loss rate) for credit card issuers is around 10%. This is roughly double the annual average of around 5% over the last several years. Thus, the risk of credit card lending (i.e. the risk of not being repaid) is higher today than it was a year ago and card lenders are losing a lot of money. In order to compensate for this increased risk, lenders must charge a higher rate of interest. Simply put, when a significant number of borrowers don't repay their loans, the rest of us end up paying a bit more for our loans.

The other factor at play here is the changing regulatory environment (i.e. the CARD Act). This accounts for changes in fee structures and, to a more limited degree, interest rate increases.

NOW: What do you think of the new credit card law—the Credit Card Act of 2009—that will go into effect early next year?

PG: The CARD Act is the most sweeping overhaul of the industry since the invention of credit cards—it requires a totally new business model because it places severe restrictions on the ability of card issuers to adjust their prices to reflect changes in the economy and changes in individual customer risk. Card companies are experimenting with fee structures, etc. in an effort to gauge customer response and determine how best to price their product going forward.

I would also note that a significant provision of the CARD Act took effect last August. This new provision addresses the single biggest area of concern raised by policymakers and consumers—the so-called "any time, any reason" re-pricing of existing balances. As of August 20, card companies must give customers 45-days advance notice of any interest increase and must also give customers the option of declining the increase and paying the balance off over time at the original rate. Hence, customers are now in total control over any interest rate increase.

NOW: Do you think the banking industry is being unfairly castigated by the media?

PG: Our financial system is undoubtedly complex and many of its aspects are difficult to grasp. Confusion and misunderstanding abound. Take the conflation of investment banks and commercial banks, for example. The two are very different entities, they engage in different business practices and are governed by different laws and regulatory agencies. Failure to recognize such differences can lead to inaccurate and unfair reporting and can also be misleading to the public. Another example is the CARD Act. As discussed above, a very significant and important provision of that bill took effect last August—a provision that entails considerable benefits for consumers. However, we continue to see media reports about interest rates going up on existing customer balances. But this simply cannot happen anymore without customer consent—it is now against the law to raise someone's rate without giving them 45-day advance notice and the option to say "no." Failure to report this is not only unfair to card companies, it is unfair and misleading to the public in that it may cause consumers to ignore some very important notices they receive in the mail because they don't feel they have any say in the matter.

 
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The Bankers' Turn: On Credit Cards


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