The Impact of the New Credit Card Act is Becoming Clearer
The new Credit Card Act went into effect on February 22, 2010. Since many start-up businesses use credit cards to fund their business, it is appropriate to discuss this topic. First, let’s review the recent past:
- RK Hammer Investment Bankers reported an increase in bad credit card debt of 59% in 2009 over 2008. Write offs were $89 billion in 2009, versus $56 billion in 2008. Estimated losses of interest income are $5.5 billion in 2010 and $11 billion in 2011.
- A Federal Reserve report from November 2009 shows 58% of all banks will lower credit limits for clients with lower credit scores, and 53% will increase minimal qualifying credit scores. CITE?
- In 2009, the two largest credit card issuing banks, Bank of America and other banks lost billions in their credit card division.
The above financial results are bad news for credit card issuers, but how does this data impact the future? When the bill was passed, The American Bankers Association complained that individuals with credit scores of 750 or more would subsidize those with less attractive credit. However, that initial assertion appears to be incorrect. Great credit account holders continue to receive promotional incentives and attractive offers from credit issuers as they are the demographic needed to rebuild the credit card business.
For example, American Express seems to have a more affluent membership than the other card issuers. The average credit score of an American Express card holder is 754, while the average score for the balance of the industry is 722. American Express holders spend more, have lower default rates, benefit quicker from an improving economy, and their write offs and late payments are declining. Although they may try to extract as many fees as possible, American Express is keenly aware this demographic will simply stop using the card should expenses climb to an unacceptable level.
In addition to targeting great credit score holders, a preponderance of increased fees will be heaped upon the subprime account holders (scores under 660). While the new Act will offer protection, issuers will most likely implement new fee structures.
How does one prepare for these changes? Work on getting your personal credit score to 750 or higher. Review your credit bureau files. Take advantage of receiving your annual free credit report. Be sure to challenge any and all wrong information. The benefits of the next phase of the credit card business lie with those who have great scores; join them!
We refer our clients who need personal credit repair to a very successful company. Call us at 1.866.254.6076 if you would benefit from such a service.
Dave Von Holten
Co-Founder, Business Credit Services, Inc.
Tags: business credit, credit card act, credit card financing, credit score