New Credit Card Rules Could Help Banks

NEW YORK (TheStreet) -- The CARD Act that goes into effect today will make the credit-card business less profitable, but also less risky, for the country's largest card lenders and issuers.

Credit cards had become a cash cow of sorts for big firms like Bank of America(BAC), Citigroup(C), JPMorgan Chase(JPM) and Capital One(COF). Credit cards provided $23 billion in fees alone last year, according to the advisory firm R.K. Hammer, and also have higher interest rates than most other types of consumer debt.

Those penalty fees soared 21% from 2008 while the average interest rate has climbed 2 percentage points over just the past six months, to over 14%, according to CreditCards.com. Customers with the worst credit have gotten hit the hardest, with their average rate surging to nearly 24.86% from 14.29% over the same period of time.

But just as implied revenue has climbed in the worsened economic environment, so too have losses from delinquencies and defaults. Bank of America, the largest U.S. lender, collected $20.3 billion in interest payments and $9.1 billion in fees from credit-card borrowers last year. Still, it ultimately lost $5.6 billion on the business in 2009 because of charge-offs of bad debt and provisions for future losses.

There have been some signs of improvement recently in monthly payment data from big banks, but they aren't out of the woods yet. Consumers are still relying on credit cards as a loan of last resort, and many of them aren't paying it back, due to job losses and other financial stress. Once the economy recovers, the CARD Act will make it much more difficult for lenders to earn quick, easy profits from even the best credit-card borrowers.