Some of the provisions of the the Credit Card Accountability Responsibility and Disclosure Act of 2009 are now effective. CEI’s Hans Bader has an excellent summary of some of the unintended consequences of this “consumer protection” measure–well, actually, most of them, such as the return of annual fees, was fully predicted:
In response to the new law, some credit card companies are starting to charge annual fees on their credit cards to protect themselves against potential losses. Others will likely drop their rewards programs, or stop giving customers’ percentage rebates on credit card purchases. For example, I and my wife get 3% to 5% back on most of our credit card purchases.
One of my co-workers just emailed me that since the new law, he will now be charged an annual fee on what he calls “the best reward card I ever found.” It’s the same card I use for many of my purchases.
The new law is supposed to “protect” cardholders. But what it really does is transfer wealth from people who pay off their credit card bills at the end of every month, (or have good enough credit that the credit card company would not likely have increased their interest rate anyway) to people with bad credit who have run up big balances.
If you make it harder for credit card companies to charge risky people higher rates than responsible people, they’ll increase rates for everyone, or make it harder for people to get credit cards in the first place.
Let me stress one point: annual fees are a uniquely pernicious form of term re-pricing by credit card issuers to deal with limits on their ability to price other terms at market rates. First, they dampen market competition because once a consumer pays an annual fee he has essentially made a capital investment and is locked into that card for the year. And if he switches cards, he has to pay another annual fee. Second, they dampen competition because they are a tax on multiple-card holding. Right now card issuers compete for my business every single time I make a purchase and I can decide which card to use for every transaction. Third, consumer surveys over many decades show that annual fees are the least-liked term by consumers of all credit card terms. Finally, as Hans suggests, annual fees are imposed on all card holders, good and bad risks and responsible and irresponsible users alike. Thus, they have extremely questionable redistributional consequences among card users.
More regulations go into effect next year, so look for more offsetting changes to your credit cards: more annual fees, higher interest rates, less-generous rewards, higher penalty fees, lower credit lines, and less access to credit.
Perhaps someday somewhere a free lunch will be discovered, but it won’t be with respect to this legislation.