Academic

The Los Angeles Times has an interesting story about banks doing an ?end run? on the new credit card rules by changing the terms of credit card accounts before the new rules take effect.  In particular, at least two major banks have been changing some accounts with fixed rates to variable rates.  As one industry expert notes, the impact of this change is that it allows banks to ?keep your rate stable while rates are really low, so that they can raise them when rates go back up again?and rates will go up.?  Among other things, the Credit Card Accountability, Responsibility, and Disclosure Act, provides that credit card accounts with a fixed interest rate cannot be changed for the first year after the card is issued, and that credit card issuers cannot raise the rate, fee or finance charge applicable to outstanding balances unless the account is 60 days delinquent?and if the cardholder pays on time for six months, the original rate must be restored.  However, these rules do not apply to promotional offers or variable rate accounts.  Hence the change from fixed to variable rate accounts.  Do these changes reflect an end run by banks?

On the one hand, these kinds of changes to credit card accounts appear to be precisely what the Act was seeking to prevent.  Indeed, the Act was passed amidst stories of banks constantly changing terms and hiking up interest rates on customers, including customers whose accounts were in good standing.   One survey found that 57.9% of cardholders said that card companies had recently increased their interest rates or fees, reduced their credit limit or raised their minimum payments.  Hence, the Act seeks to curtail these practices, and even has a provision aimed at ensuring that increases in interest rates for cardholders in good standing can only occur based on factors tied to a cardholder?s behavior related to the card. 

On the other hand, some banks warned that the Act would prevent them from distinguishing between risky and non-risky cardholders, thereby forcing them to increase rates for everyone.  And one can certainly read the move away from fixed-rate accounts as consistent with this warning.  Indeed, given the reality of market and banking conditions, it is no surprise that banks would seek ways to limit their exposure and cover their record losses.  Interestingly, a recent survey shows that interest rate hikes on credit cards have gone up since February (the month when the Act was passed).  Spokespeople for the banks insist that these recent changes reflect an attempt to better manage risks and better respond to changing market conditions.  But one wonders if that is just short hand for end run.  Certainly the public seems to think so.  An informal poll at the LA Times sites reveals 89% of those who took the poll believe that the changes simply reflect a ?bait and switch? by the banks.