Credit Card Reform Act | Cooper Business School

Effect of Credit Card Reform Act on Payday Loans and Housing Market

Guest article written by Justin Scott

The Credit Card Accountability Responsibility and Disclosure Act, known as Credit Card Bill of Rights was advocated by President Obama to protect consumers from exploitation by the credit card industry. However, the law makes credit cards less lucrative for banks. It has compelled credit card companies to hike interest rates and fees. Around 40% of banks slashed credit lines on current accounts. According to a renowned consultant firm, this reduction in credit lines has removed around $1 trillion of available credit.

Effect of Credit Card Reform Act on sub-prime credit cards

Sub-prime credit cards are offered to consumers who have credit problems such as low credit score or poor credit history. These cards come with fees of all kinds. However, after the Credit Card Reform Act, interest rates of these cards have gone up. Some companies issuing these cards have changed the interest rates from fixed to variable. This makes the cards even more expensive to hold. For this reason, the sub-prime credit card companies are expecting a lower level of business in 2010.

Effect of Credit Card Reform Act on payday loans

Even after the Credit Reform Act has come into effect, there’s no cap on the interest rates charged on the credit cards. While credit card companies can’t raise interest rates on current balances unless you’re 60 days late with a payment, they can increase rates on future purchases any time and for any reason.

Moreover, the credit card companies have imposed a number of fees on credit cards. Consumers are finding it difficult to maintain credit cards because of increased payments. Therefore, more and more people are opting for payday loans to get easy cash. Consequently, more and more payday lending outfits have come up across the US. Currently, there are around 22,000 payday lenders in the country and the number is still going up.

Effect of Credit Card Reform Act on housing market

According to a leading consulting firm, new rules on credit cards are expected to hit housing industry also. Because the new law makes credit cards less profitable for banks and credit card companies, they have taken steps to recoup their losses by increasing the annual fees, balance-transfer charges, variable rates, and etc. It has become quite expensive to manage these cards. This has made it hard for consumers to maintain both the credit cards and mortgage payments. As such, people are of the opinion that less number of people are likely to apply for mortgage loans. This in turn may slow down the US housing market recovery.

Finally, the law is expected to cut down future bank profits. Fair Isaac Corporation projects that on an average, credit cards will generate around $100 revenue per month which was around $200 a month before the law came into effect. Moreover, only the Americans who have good credit score are likely to benefit from this Act. Therefore, those who are struggling with debts, be it secured or unsecured, need to take immediate steps so that they can manage their debts and improve their credit score to benefit from this Act.