Will New Credit Card Rules Cause a Spike in Bankruptcy?

On February 22, 2010, a number of new regulations will go into effect requiring changes in the business practices of credit card issuers.   These new rule, part of a law called the Credit CARD Act of 2009, includes several provisions designed to benefit consumers, including:

• limits on interest rate hikes on existing balances
• a 45 day delay on “universal default” – the practice of raising the interest rate on a credit card account because of a default on another, unrelated card account
• the right to “opt out” of changes to account terms, close your account and to take up to 5 years to pay off the balance
• minimum of 21 days to pay your bill before default kicks in
• limits on extending credit to young people under 21
• elimination of automatic “over limit” transactions – you must enable your card to allow for over-limit purchases and associated fees (non-enabled cards would be rejected if you are over your limit)
• card issuers must pay higher balance portions of your account first

I suspect that most consumers will agree that these provisions do offer some meaningful protections.  I do note that there is nothing in this law about limiting interest rates – in my mind 29% interest rates are a bigger problem than getting more time to opt out of account term changes.

I think that before we begin celebrating these common sense changes, we should recognize that from the credit card companies’ perspective, these new regulations will negatively impact profits.  And credit card companies have many smart lawyers on staff advising them how to recapture those profits by taking actions that are not prohibited by the new laws. 

I predict that when these new laws go into effect we are going to see more instances where credit lines are closed and demand for payments made.  We will see more aggressive collection efforts sooner.  We will see faster triggers on interest rate hikes because of the delays in hikes set out in the law.  And we will see less inclination by credit card lenders to “work with” debtors who have always paid their bills but now need a little breathing room.

In my experience, any squeeze on credit card profits will equal a squeeze on consumers struggling to pay debt, and that will mean more consumers will end up looking at bankruptcy as a way out.

Tagged as: Credit Card Act of 2009, credit card default, credit card laws, credit cards and bankruptcy