There's an old expression: "When the US sneezes, the rest of the world catches a cold." Our recent housing crisis and recession quickly spread around the world. Now we're exporting something a little more pleasant: consumer protection.
Editor’s Note: This post comes from partner site LowCards.com.
The United States is not the only country that experienced a credit meltdown or government regulations for the credit card industry. Other countries are going through similar situations. Here is summary of the credit card changes taking place in other parts of the world.
Australia started enacting credit card regulations in 2003, during a time of prosperity and years before the global recession. However, this regulation benefited retailers, not consumers.
In 2003, the Reserve Bank of Australia responded to retailers’ complaints about interchange fees and passed regulations to reduce the hidden costs and fees of credit cards. It forced banks that issued Visa and MasterCard to reduce their interchange fees from roughly 0.95% of the transaction to approximately 0.5%. While this was good news for retailers, it was lost revenue for banks and issuers, who turned to cardholders to make up this revenue. According to the New York Times, issuers decreased credit card rewards and frequent flier miles, as well as cutting the grace period from 55 days to 33-44 days. In addition, some issuers increased annual fees for reward cards. The regulations also gave merchants the right to impose surcharges for credit card transactions. In some cases, the new fees exceeded the old ones.
Today, the interchange fee is a hot topic for American retailers who are disappointed it wasn’t included in the CARD Act. According to the General Accountability Office, consumers and businesses spent about $48 billion in these interchange fees in 2008.
Issuers are lobbying against changing the interchange fee because they claim the fee brings consumer benefits such as more rewards, reduced fraud, lower interest rates and system innovations. They warn that lower fees will force them to squeeze credit and raise the cost of credit cards.
“After our experience in this country with the CARD Act, we have learned that regulations usually increase the cost of business for credit card issuers and they will find a way to pass on these additional costs to the cardholders,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “Consumers may benefit from reform in the short run, but reform isn’t free.”
The government in the UK is attempting changes that are similar to those in the United States. The UK Cards Association, which represents the credit card industry, is voluntarily making some of the changes and implementation is required by the end of the year.
Government proposals require issuers to:
- Change payment allocation so that cardholders pay off the more expensive debt first.
- Provide better communication to inform cardholders that making only the minimum repayment is the most expensive way of paying off a debt.
- Stop raising borrowers’ credit limits without their consent.
As in the United States, issuers in the UK are increasing interest rates and reducing risk to adjust for the growing default rate. The average rate charged on a credit card had reached 16.25% by the end of December, up from 15.58% twelve months earlier. This is the highest rate since October 2006.
Canada passed credit card regulations in September 2009 that are similar to the CARD Act. They went into effect January 1, 2010.
Regulations required issuers to:
- Inform consumers how long it takes to repay the balance by only making the minimum payment.
- Give a 21-day interest-free grace period on all new purchases when a customer pays the full balance.
- Fairly allocate payments.
- Obtain card holder’s consent before increasing the credit limit.
- Provide advance disclosure of rate increases before they take effect
Ottawa is also proposing legislation that would give the federal finance minister the authority to regulate the market conduct of the credit and debit card networks and their participants, if necessary.
Mexico is attempting to place limits on interest rates and fees. In February, Mexican lawmakers approved a proposal that lets the central bank establish reasonable ranges on interest rates that banks can charge for credit cards.
According to Reuters, credit card interest rates in Mexico have fallen over the past year, from over 40% on average to 32%, in part because some banks offered incentives to encourage cardholders to reduce their balances during a slumping economy. Bank executives say interest rates are high because of the greater risk of default and weak laws to recover debt.