May 26

President Obama signed the Credit Card Reform act (officially called the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009) last week and I’d like to offer my thoughts. First, let’s review the rules that will be put into place under this legislation:

  1. Institutions would be prohibited from treating a payment as late unless the consumer has been given a reasonable amount of time to make that payment. A safe harbor provision suggests that statements must be mailed 21 days in advance of the account’s due date. If the due date occurs on a day the postal service doesn’t operate, the payment may not be considered late if received on the next business day.
  2. When different interest rates apply to different balances, payments must be allocated according to a new method. The bank wil no longer be permitted to apply the entire payment only to the lowest interest balance.
  3. Banks would be prohibited from increasing the interest rate on existing balances. This doesn’t apply in the case of a variable rate tied to an index, nor the expiration of a teaser rate.
  4. Banks may not assess an over the limit fee due solely to a hold placed on available credit.
  5. Banks would be prohibited from double-cycle billing, i.e. calculating interest due based on prior months’ balance.
  6. Banks would be prohibited from financing security deposits or fees for the issuance or availability of credit if those deposits or fees ulitize the majority of available credit on the account.
  7. Banks making firm offers of credit advertising multiple annual percentage rates or credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest annual percentage rate and highest credit limit advertised.

These are the major points contained in the 269 page pdf, available from the treasury web site (Note – The document may not open in some vbrowsers, right-click if you wish to download and read it). Now, let’s look at what isn’t addressed and the unintended consequences of this legislation:

  1. Grace periods – there is nothing here to stop banks from charging on one’s daily balance (as banks do with HELOCs.) As banks feel the squeeze on their bottom line, it would be simple to do away with grace periods entirely, and any use of one’s card would accrue interest.
  2. Annual Fees – I have a number of credit cards, all of which I pay in full each month, so the interest rate is of little concern so long as the grace period is in effect. The only card that carries an annual fee is the one that offers me airline miles. I suspect that moving forward, few cards will offer no annual fee.
  3. Reduced rewards – One card I carry offers a 2% rebate into a 529 (college saving) account. With no fee, this card is a no brainer to use. I’ll expect a letter soon that the reward percentage is being reduced.
  4. Reduced/Canceled credit lines. Self-explanatory, but perhaps the worst of the potential results. Remember, as I discussed some time ago, your Credit Score (FICO) is made of of multiple factors, one of which is credit utilization (the percent of your outstanding line used). So, you may only owe $3000 on a card with a credit line of $10000, and think all is well. But the bank then reduces your available limit to $5000, and now your percent used has doubled, possibly impacting your credit score.

This is one story I am certainly going to follow, as we all have an interest (pun intended) in its outcome.


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Nov 28

As I passed a few gas stations this week and saw $1.89 regular, less than half the cost just a couple months back, and after the initial sense of relief that a tank will less than $30 and not nearly $60, I can’t help but wonder of the longer term impact of this dramatic fall in prices.
One of the unintended consequences of this drop is that the talk of finding alternative energy sources has dropped from being a huge issue early in the recent election campaign to a topic barely discussed. There was also talk during the campaigning of creating ‘green’ jobs based on these alternative energy sources. I understand that there’s a delicate balance, that, at least in the short term, the high gasoline prices was doing far more harm than any future good that would come of it. I just hope we don’t become complacent and assume these low prices will continue indefinitely.

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Jun 09

Last week, I read a story on stating that American Airlines was planning to charge $15 per checked bag. Here’s my response, also posted on the SmartMoney web site;

Have they really thought this through? This change in policy will have an ‘unintended consequence’ that will quickly become apparent.
As a frequent flier on American, I’ve noticed that when a flight is pretty full there’s a good chance that right as the last passengers are boarding, they realize there’s no room for their bags, the overheads are full. Now, it won’t take much to tip things to be even worse. If even 10% of the fliers decide that the $15 for the checked bag is not worth it, the overheads will fill on a more regular basis. That last few minutes of scrambling will become even longer, and flights will be delayed as those bags need to leave the cabin to get loaded into the belly of the plane. When I first heard there was talk of charging for bags, I thought they would charge for the carry ons, not checked luggage. Too bad.

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May 05

I’m starting to see more articles supporting my fears regarding the conflict between BioFuel and BioFood. The tragic unintended consequences of corn based ethanol is that the cost of food, starting with the grains, corn, wheat, and rice, has increased dramatically over the past year. Here is a chart from the World Bank illustrating this unfortunate price rise

World Food

Liz Ann Sonders (at Charles Schwab and Co.) recently wrote a piece on this topic titled “Beast of Burden: A Global Food Crisis Erupts.” An excellent discussion on this topic.


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Feb 13

In September and October, I talked about unintended consequences. I can’t help but ponder the concept, and will continue to post those that strike me as more than a passing thought.

We, as a country, are trying to get away from the stranglehold the oil producing nations seem to have over us. The current $3/gallon price of gasoline is putting a dent in all of our budgets, and the search for alternative fuel is on. Now, I believe that once an ideal storage system (read that – a better battery) is created, we will all be better off as wind and solar energy will gain favor. But, meanwhile, I hear a demand growing for “home grown” fuel in the form of ethanol, created from corn (or other grain). This scares me. It’s not too tough to see that any large use of this piece of the food chain will have a ripple effect on the rest of the system. First the cost of all grains will rise due to the increase in demand. Then the cost of any grain-fed livestock will rise as well. We will have a solution that’s far worse than the original problem. I welcome any view to the contrary.

Here is the futures chart for corn, a scary picture to say the least.

Corn Futures


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