New Consumer Law Could Make Credit Cards More Exspensive for Some

The new credit card rules that President Obama signed into law last month will provide a number of protections for consumers. But some analysts say that many consumers will actually end up paying more to use their credit cards or may find it more difficult to obtain credit to begin with.

The criticisms are based on the premise that the legislation restricts some of the industry's more profitable practices. For example, credit card companies will no longer be able to unilaterally raise interest rates on existing balances - as sometimes happened when customers loaded up on debt at low interest rates, only to see those rates get jacked up down the line. The new legislation also places limits on late fees and over-limit fees, which by some accounts were earning the industry $20 billion a year.

Need to make up lost profits

With those profit streams drying up, the reasoning goes, the credit card companies will have to look elsewhere to make their profits. That could mean higher interest rates overall, the reduction or elimination of frequent flyer miles and other perks, and possibly even the return of annual fees. In some cases, they warn, even the cherished "grace period" - the practice by which customers pay no interest on balances paid in full each month - could be eliminated, and replaced with a system in which interest is charged from the day of the purchase.

"It will be a different business," said Edward Yingling, chief executive of the American Bankers Association, which lobbied against the new rules. "Those that manage their credit well will in some degree subsidize those that have credit problems."

Of course, some might say that what's actually been happening is that people who don't manage their credit well have been subsidizing those that do. By some estimates, one-third of all credit card customers effectively use their cards for free, paying no fees or interest charges simply by paying their balances in full each month, even while they may be earning bonuses like frequent flier miles or cash back.

End of the free ride?

Ironically, such customers are sometimes referred to as "freeloaders," because they essentially get credit for free. But the industry model has been based on making its money off those customers who do not manage their finances as well. With the new rules limiting what companies can charge the latter group, many expect that credit card companies will have to start charging the "freeloaders" as well.

Market pressures will likely limit what credit card companies can do. Many customers, for example, will likely close out extra cards rather than pay annual fees. And the grace period is so well-established that companies will likely find it difficult to eliminate. But customers may find that they have to choose between the two, picking either a card with no annual fees or one that allows a grace period, but not getting both with the same card.

Other changes may include higher fees for cash advances, late payments or balance transfers, and a switch to variable interest rates on a broader ranges of cards. Perks such as cash-back, free gasoline and frequent flier miles will likely be reduced. And some smaller credit card issuers may get out of the business entirely.