Throwing the dog a credit card

My dog never got a credit card. I say that with some regret because it’s a column I always wanted to write. Several years ago, I heard from a reader who said her dog, whose name was Riley, had been sent a card application. As we pick through the rubble of the financial system, it’s hard to remember that just a few short years ago, money was so cheap that even canines could get instant credit. It was one of the more ridiculous examples of banks’ dangerous love affair with risky customers — be they golden retrievers or subprime mortgage borrowers. The relationship was a profitable one, but we’ve come to the end of the affair. President Barack Obama recently signed a bill that would eliminate many of the credit card practices that fueled consumer debt spirals, sucking borrowers into an inescapable vortex one fee or interest rate hike at a time. The new law curtails tactics such as applying interest-rate changes to existing balances retroactively or charging interest on bills paid on time. Issuers now must apply payments over the minimum balance to charges with the highest interest rate first, and they can’t accept charges that put cardholders over their credit limits, thereby generating fees. Banks must give cardholders advance notice of interest rate changes, instead of informing us after the fact. They also can’t issue cards to anyone under 21, which presumably applies to dogs as well as humans. The banks seem to be having a hard time accepting that the affair is over. The American Bankers Association has said the new law will mean that fewer people will get credit. It also warned those who do may not be able to get as much, as if either of those are bad things. Card issuers have suggested that to offset lost fee revenue, they may raise interest rates on customers who pay on time and charge fees to those who clear the balances every month. In other words, since they can no longer exploit less responsible borrowers, the banks will beat up their best customers instead. It’s as if they haven’t yet figured out that their world has changed. In an era of renewed thrift, consumers who can pay their bills are also likely to be consumers who don’t need as much credit. In fact, some customers may question the need for credit cards at all. Like a lot of cardholders, I pay a hefty annual fee on my personal credit card solely for the airline miles. While I’m generally opposed to paying for discounts, I’ve played along because of the lucrative nature of air miles. However, given the cutbacks in frequent flier rewards, higher card fees may make me change my mind. The credit card changes come as the banks are still reeling from losses caused by their other bad lending habits. Now, rising unemployment — which tracks card default rates — and the new restrictions in the law are threatening to erode the once lucrative card business. Already, banks have been cutting back, withdrawing about $320 billion in credit lines just in the first quarter and bracing for writeoffs that could hit $94 billion this year, compared with $64 billion last year, according the Nilson Report, an industry newsletter. It’s hard to feel sorry for banks that, dug this hole for themselves. Rewarding responsible customers won’t generate the fat profits that card issues have come to expect, but it’s a key step in getting the banking industry stabilized. Just like subprime mortgages, the credit card games represent an area where bad financial behavior was rewarded and profits justified any practice. No wonder the business went to the dogs. loren.steffy@chron.com