A crackdown on credit-card companies?
Posted
May 05 2009, 02:13 PM
by
Kim Peterson
Rating:
Do credit-card companies actually want to keep their customers? The way some are behaving suggests otherwise.
They're raising interest rates to 20%, in some cases. They're cutting back the spending limits of customers -- even the ones who have paid their bills consistently. They're pulling credit lines too quickly. They're socking people with new fees and raised fees.
In short, they're making life harder on the customers they have to make up for the business they've lost. The debt that credit-card companies are unable to collect is rising and could hit 10% next year, according to Moody's Investors Service. Those massive losses has companies panicking.
Enter the Credit Cardholders Bill of Rights. That's a bill that breezed through the House last week and is headed to the Senate. It requires card companies to warn customers of rate increases 45 days in advance. Companies won't be able to retroactively increase interest rates. They have to mail billing statements 25 days before the due date.
It's a consumer protection bill that credit-card companies hate, no surprise. They say it will cost them money, and that they won't be able to give as much credit to customers as a result. They say it will hurt the people who really need credit the most.
Some analysts agree. Putting more restrictions on card companies will cause credit to tighten further for their customers, said Randy Carver, an investment adviser with Raymond James, in a recent Forbes article.
Credit-card revenue has been a big moneymaker for banks over the years. It contributed about 22% of JPMorgan Chase's (JPM) total revenue in the past three years, Bloomberg reports. The top seven card issuers pulled in $27 billion in operating profit from credit cards in 2007.
It's a cash cow, but one that's looking a little underfed these days as consumers rein in spending. Some are defaulting on credit card debts; others have tucked their cards away in a drawer until the economy improves.
Will this bill truly damage the card industry? Should investors be worried? One big-name investor doesn't think so. John Jacquemin, head of investment firm Mooring Capital, told Forbes the bill should have little impact. In fact, he's even closing most of his short positions on credit-card firms.
That may be a wise move, considering how some credit-card stocks have soared in this spring's rally. Capital One (COF) has gone from $9 in March to nearly $20. American Express (AXP) rose from $11 to $27 in the same period. Discover (DFS) went from $5 to $9.
I'm not in favor of telling credit-card companies how to run their business. But I like a bill that requires them to be more transparent about it. Card companies have hidden behind the fine print and played games for too long, and customers deserve better as they try to rebuild their finances in this economy.
Image credit: Channel R, Creative Commons Attribution Share Alike 3.0 license
Related reading:
AmEx tightens the credit strings
Credit-card companies need to chill out
Visa everywhere you want to be
