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Credit Card Companies Brace for Changes as Senate is Set to Approve Industry Overhaul Bill

Source: WSJ

Posted on 19 May 2009

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Credit-card companies, resigned to tough new rules for their industry, are threatening to raise interest rates on some less-profitable customers or even cut them off entirely.

The Senate today is expected to approve a bill to overhaul the credit-card industry's business practices, with the House of Representatives soon to follow. President Obama could sign the bill as early as next week.

The bill limits fees, imposes new restrictions on when card companies can raise rates on delinquent customers and sets new rules for how companies apply payments on balances.

Although some details of the proposed rules are still up in the air, company executives say in interviews that they are weighing options to earn profits in a more restricted environment.

"Everyone has to figure out a way to significantly drop costs and improve the profitability of each customer," said a card-industry executive. Among the possibilities: cutting off customers who use their cards infrequently even if they pay on time.

The legislation comes amid an outcry about the credit-card industry's practices, from the way the firms disclose interest rates to the data that they consider when determining if a customer is a good risk. The fury has intensified as credit-card issuers, hit by record default rates and rising delinquencies, seek to limit losses by cutting credit lines, raising fees and closing inactive accounts.

Card-industry executives are resigned to many of the new legislative restrictions. "There is clearly going to be a massive change in the way the industry looks today, with material reductions in balance-transfer offers and other teasers," said Tony Hayes, a partner at consulting firm Oliver Wyman in Boston.

Industry executives are most aggrieved by a measure in the Senate bill that would limit their ability to raise interest rates on customers until they are 60 days late on a payment. Card issuers, which currently can raise rates and impose fees when a customer is 30 days late, say such "risk-based pricing" is a key part of the industry's economics.

"There is no question that all of these changes will make credit available to fewer," said another senior industry executive.

That argument holds little water with Gail Hillebrand, a lawyer for Consumers Union in San Francisco. Consumer groups are skeptical the measures will severely crimp credit, noting that the companies won't be likely to give up the billions of dollars in fees that merchants pay for transactions made using plastic. "They ought to be doing good underwriting in the first place and have a good idea of what they need to charge before customers borrow the money," she said.