Government's New Enemy: Credit Cards

So, in an effort to make people that can't read or pay bills less responsible for their actions, Obama leads credit card reform.

Let me begin by throwing this out there. In addition to buying a house that I can afford with a mortgage that I understand (and maintain a self created amortization spreadsheet), I am also supplementing my income by manipulating credit card rewards. This year, I may be able to make more than $1000 through cash back, bonus deals, and overall fancy footwork. My fiance at the time, bought my engagement TV at 0% for 6 months by signing up for a new card. I helped save over $1500 on my honeymoon by getting and using the Priority Club credit card to boost my hotel points. I also get to track all of my spending and easily manage my cash flow by having only a few monthly payments rather than daily. All of this has come at zero cost because I can read and I can pay my bills. Needless to say, I don't see credit cards as the enemy, they are actually pretty badass.

I think my favorite lines in this article are:
“We stood up for consumers and stood up to abusive credit card companies,” - Harry Reid
“this bill fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk." -Edward L. Yingling (Don't get me started on Yuengling)

So, the government is standing up to the big-bad credit card companies that charge people higher interest if they are high risk. This is just like when they stood up to the big-bad mortgage companies that wouldn't loan money to people that have bad credit (ironically, also a high risk). That worked out great. Luckily, there's a big difference between credit card companies and mortgage companies. Mainly, the flexibility that credit card companies have (or had).

Anyhow, here's where I expose how much I know or do not know. Credit card companies make money two different ways:

A) Charging transaction fees for the use of the card, paid by the merchant
B) Charging interest on overdue balances and late fees on late payments by 'bad customers' or annual fees

So, the government is restricting the amount credit card companies are allowed to charge 'bad customers' that do not pay on time and cause cash flow issues and finance charges to the company. All else being equal, which is a fair assumption since shareholders will want to keep revenue growth and profit rates the same, this has to result in one or both of the following:

A) Increased transaction fees
B) Increased cost to 'good customers'

Increased transaction fees would result in the overall increase in cost of all goods and services across the board. The only merchants able to avoid this would be cash only merchants (Speedi Pig BBQ in Fayetteville, Ga), unless they offer credit pricing separate from cash pricing. Gas stations used to do this before they realized that cash customers would pay the credit price. So, if merchants offer cash only pricing, that means two things:

A) Decreased revenue for credit card companies
B) Individuals with the ability to pay cash pay less for goods and services

Clearly, the government is not concerned with the revenue of credit card companies, so this is not an issue. However, in hard times, the people that require the use of credit cards will be those who do not have cash on hand. So, you will be giving the wealthy, or at least the responsible, a visible price advantage over those relying on credit cards.

So, based on what I know about our new government, it is their responsibility to ensure that credit cards do not increase transaction fees so as not to 'tax the poor'. That leaves credit cards with the only option: increase cost to 'good customers'. Increased interest rates won't work, because I don't pay finance charges for carrying a balance. So, either my purchases will begin accruing charges before I am billed or I will start paying annual fees and not receiving cash back.

Needless to say, I sold my Visa stock and kind of felt good knowing that the loss I realized will be tax deductible.