Fisher Investments Editorial Staff
Personal Finance, Interest Rates

Charge It, Please!

By, 12/21/2009

Story Highlights:

  • The Credit CARD Act of 2009 takes effect February 22, 2010.
  • Though intended to protect consumers from unexpected rate rises, private banks likely know how to balance risk with profit in this business better than legislators.
  • It's not surprising to see credit cards raising rates in advance—this is what happens when government tries to control prices.
  • But don't expect this to derail the bull—the law was signed months ago and stocks seem little bothered, if at all.

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With less than a week till Christmas, cash registers are ringing. Embracing the myriad benefits credit cards bestow (purchase protection, points, miles, etc.) many folks are charging up a storm—but maybe fewer than usual. Cardholders nationwide, creditworthy and not, have been subject to sudden interest rate increases—the most extreme may be the headline-grabbing 79.9% APR for one bank's secured subprime cards.

Higher rates for all are one of the unintended consequences cropping up in response to the Credit Card Accountability Responsibility and Disclosure (Credit CARD—cute, huh?) Act of 2009. Credit CARD aims to protect consumers from "arbitrary" changes to their credit card contracts (e.g., interest rates, fees, over-limit charges, etc.). Subsequently, banks have been scrambling to change terms and rate structures before the bill takes effect next February.

Are they just playing Scrooge? Likely no. Credit card interest rates reflect the risk banks take in extending customers short-term, exceedingly immediate loans—which can be high and volatile. Further, credit cards (alongside mortgages) were a significant slice of the securitized debt market—banks must now carry more loans on their books and that means more risk and higher rates. Plus, banks had the luxury of offering better credit risks lower rates because they could make up for it by hiking rates as risk cropped up. Banks don't expect you to miss a payment or two, but if you did, they could raise your rates to adjust for this new information. But since banks soon won't be able to raise rates easily to adjust for new risks, they're simply getting it all done now—which means higher rates even for those with saintly credit.

And this could also mean less credit for those with a more spotty history. Fewer firms extending credit likely isn't the legislators' goal, but it may be the outcome. We're not saying all financial regulation is bad—just that it often imperfectly corrects the last crisis while unwittingly setting up the next one. Also, restrictive credit card rules likely aren't a great boost to the issuers' bottom lines. (Though who knows—maybe 79.9% interest rates get a lot of takers and are an unexpected windfall.) Overall, our assessment on Credit CARD is it's typical government meddling. And though inconvenient to those who carry a credit card balance, it's not remotely enough to deter the bull. Financials are likely to underperform for the near term anyway. So get shopping, but check your rate! 80% is a lot of rent to pay for the eReader you bought for Uncle Melvin.

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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