Credit Card Companies Defy Congress, Not Logic

The Washington Post reports that credit card companies have begun raising interest rates and fees to prepare themselves for the new regulatory restraints set to take effect next year. As you might expect, Congress isn't happy. But they shouldn't be surprised.

Here's what they're doing, according to the Post:

Chase, for instance, will raise the minimum payment required of some of its customers from 2 percent to 5 percent of the statement balance starting in August. Chase and Discover have increased the maximum fee charged for transferring a balance to the card to 5 percent of the amount, up from 3 and 4 percent, respectively. Bank of America last month raised the transaction fee for balance transfers and cash advances from 3 to 4 percent. Card issuers including Bank of America and Citi also continue to cut limits and hike up rates, which they have been doing with more frequency since January.

I can almost still hear the echoes from the voices of people who thought credit card companies might just have to accept a fate of lower profits after the new legislation. Not so much. As this shows, they have begun to rework their risk models. In order to keep their business profitable, they're hiking interest rates and fees. And some of those changes will affect everyone.

Senator Charles E. Schumer (D-NY), weighs in (from the Post):

"This is what many of us feared about a law that didn't take effect right away," Schumer said. "It was never going to take this long for the credit card companies to get ready for the new reforms. Instead, issuers are using the delay in the effective date to wring more dollars out of their customers. It is against the spirit of the law, and it is just plain wrong."

Oh Chuck. You can't stop credit card companies from trying to make a profit. You can try, but you will fail. If the new regulations had taken effect in two days, the credit card companies would have rushed to change fees and rates in one day. They just would have done so even more arbitrarily, with little time to do legitimate analysis.

Before people start commenting angrily, I'm not making a value judgment of whether credit card companies' actions here are right or wrong. I'm just noting that they're always going to be out to keep their profits as high as possible. That should surprise no one.

But what about Schumer's contention that issuers never really needed the time lag that they're getting? Rubbish. Some insiders I spoke to back in February told me that, if these regulations were to be effective within three months, as originally proposed, it would be very, very bad. The companies might have been forced to turn off people's credit cards for a period of time until they could ensure compliance with the new regulations. Talk about a credit crunch.

What takes so long? Credit card companies will have to modify their computer systems, underwriting standards, servicing procedures and risk management. They will also have to send virtually every customer new disclosures, carefully crafted by scores of lawyers who will make sure the new language adheres to the new standards.

I understand Schumer's frustration, but he's wrong to say that the credit card companies were lying about the transition period necessary. The new regulatory framework is extensive. To say that card companies can reshape their relationships with millions of accountholders in just three months is madness. And besides, they would have just raised rates and fees in three months instead, but more haphazardly.