Credit card reform

Thank you, Washington. That's not exactly a phrase many people are sending toward our elected representatives these days. But it's an appropriate sentiment after the Senate and House overwhelmingly approved new rules on the credit card industry--and the President sined the bill. The legislative changes will offer consumers greater protection from arbitrary and abusive practices that became all too commonplace in recent years. The credit card industry will be better off, too.

Among the most important new rules for consumers are: Credit card companies must give at least 45 days notice before hiking rates or changing terms of the contract; no more over-limit fees; the credit card bill must go out at least 21 days before its due date; any money paid over the minimum goes toward the highest interest rate debt first; and students under the age of 21 can't get a credit card without a parent or legal guardian as the primary cardholder. There is also a 5 year life for gift cards.

Now, in the past week you've probably read or heard stories about how the rule changes will force credit card companies to stiff their best customers, the ones that pay their off their bill in full at the end of the month. Company representatives have said the only way left for the industry to maintain profit margins is to raise rates, boost fees, or combination of the two on these financially responsible customers.

I don't buy it at all. For one thing, the financial market is competitive enough that if existing companies start offering their best customers a worse product other companies will offer these customers a better deal. What lender doesn't want a book of business from people who pay off their loans in full and on time while pocketing the fee merchants pay to the card company's? For another, I don't know of any business that thrives by treating its good customers poorly. Just ask executives in the recording industry.

My bet is that all credit card customers end up with a better deal than before. The main industry players may change, but so what? Competition, innovation and better informed consumers is a recipe for the market to push savvy managements into developing better products, not to embrace inferior ones. And credit card companies that could only make money by taking advantage of consumers through obscure rules and arbitrarily rule changes will fall by the wayside.

That said, old rules or new rules don't matter. Credit card holders should stick to the borrowing basics of plastic. A credit card is a technology that offers convenience. Forget the line of credit: Pay off the bill in full at the end of the month. Indeed, for most people I'd get into the habit of using their debit card--and electronic checkbook--for convenience.

Here is a good detailed examination of the new rules: