Posted by Todd Zywicki:
Credit Card Issuers Reimposing Annual Fees in Response to New Card Regs:
http://volokh.com/archives/archive_2009_08_16-2009_08_22.shtml#1250902152
Some of the provisions of the the Credit Card Accountability
Responsibility and Disclosure Act of 2009 are now effective. CEI's
Hans Bader [1]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.
References
1.
http://www.examiner.com/x-7812-DC-SCOTUS-Examiner~y2009m8d21-New-Credit-Card-Law-Eliminates-Cash-Back-and-Rewards-Programs-Harms-Responsible-People
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