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Makin' Money

Taking the measure of credit card reform

Chris Farrell Feb 15, 2011

A former colleague once defined personal finance as getting out of credit card debt. Exaggerated? Yes, but he wasn’t far off (although in the future the definition could change to dealing with student loan debts).

Ever since credit card reforms became effective a year ago the industry has blamed the new regulations for a variety of actions that make credit cards less attractive to consumers, including recent interest rate hikes.The folks at CardHub decided to research the claim that the CARD Act was the culprit behind higher rates for credit cared consumers.

The impetus of this study was that intuitively it did not make sense for the CARD Act to cause a rise in the cost of consumer credit card debt. This is because the CARD Act did not aim at stopping credit card companies from charging consumers whatever they want in interest – they were allowed to do it before and are still allowed to do it now – but instead it aimed at preventing the “bait and switch” tactic that many credit card companies used.

CardHub used three different methods to come up with their answer–a look at the legislative and economic environment, an historical analysis of interest rates and debt, and astatistical model. All three techniques came up with essentially the same result: The fault lies with the economic environment, and not the CARD Act.

Still, the rate hikes might stick. Yet it’s clear bank managements are rethinking their consumer strategy. In a sense, the business model went from bait-and-switch and other dubious tactics during the boom to burn-the-customer following the bust to boost-fee-income in the recovery.

But banks are learning that their recent actions have backfired. It’s hurting business at a time when many hard-pressed households are still wary of spending and borrowing, A number of major banks are starting to pull away from higher charges, according to this Wall Street Journal story.

The article makes a convincing case that consumers have bargaining power. :

To get a better deal, borrowers should exploit banks’ desire to curry favor, say consumer advocates. Before opening a new account, ask about late fees and penalty interest rates. “You can negotiate far more than you’d think in this environment, even with lenders that have different fee policies,” says Gerri Detweiler, a personal-finance adviser for consumer-education site Credit.com.
Likewise, ask about other charges, such as annual fees, balance-transfer fees and foreign-exchange fees, say consumer advocates. In this environment, the customer is always right. “For borrowers with good credit, you can go out there and go shopping,” Ms. Detweiler says.

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