The people that are quoted in this article are idiotic. Banks make money on credit cards even if you pay your balance in full each month and never pay interest.

They do this by charging what are called merchant or interchange fees to the merchant who takes your credit card for payment. For Visa and Mastercard, those fees are typically 2-4% of the purchase (which is why certain merchants like some gas stations offer a few cents discount for paying cash).

So for example, a person making $1,000 a month in credit card purchases probably grosses the bank $30 a month ($360 a year) in merchant fees even if they pay the balance in full each month and never pay interest. Now of course the bank has some expenses from that in issuing the cards, processing payments, etc. but their net is still a decent profit.

For people carrying a balance and paying the incredibly high interest on credit cards, yes, the bank can make a lot more profit so long as they keep paying. But the reality is banks consistently have to write off piles of money on all the deadbeats who default on their credit card bills. For many banks, the amount of people defaulting on their credit cards is approaching 10% right now. The reality is that the balance carrying/high interest payers are not subsidizing the prompt payers, they are actually subsidizing the deadbeats who don't pay at all.

As long as there is any reasonable competition in banking, people who are responsible with their money and pay their bills promptly get lower bank fees and costs because there is more competition for their less risky business. The banks don't make a high percentage of profit on such business, but that is entirely normal since there is low risk with their business and there are almost no write offs.

On the flip side, banks that extend credit to high risk customers, have to charge them a high rate of interest and high fees because they have to cover the higher risk and cost of higher rates of default that are inevitable in that area.

Any bank that thinks they will be able to break with reality, and shift cost away from the risky and the deadbeats to the prompt payers is foolish. There is still too much competition. Numerous banks will still be happy to give good paying customers no annual fees, etc. and still make a decent profit on the merchant fees with a low risk customer base.

Only government can punish people who follow the rules and reward the foolish by using the force of law, which unfortunately Obama is doing plenty of. But for now, banks will thankfully still compete for customers.

I don't think that the new credit card bill limits competition. As far as I can tell, it will make lending to higher risk customers less attractive and less profitable, by artificially restricting interest rate increases, etc. I think it's a bad bill, because people frozen out of credit cards are likely to turn to even more expensive financing outlets such as check cashing places and pawn shops. But who knows, maybe even a few will become more financially responsible without easy credit.

Regardless, there still will be thousands of banks issuing credit cards and providing ample competition for people who are credit worthy. Of course, eliminating the higher risk card holders will make many banks overall credit card business less profitable, if for no other reason than it will make it smaller. It's highly possible that some banks will attempt to compensate for this and do some of the things mentioned in this article by instituting new fees for their remaining customers.

But with thousands of banks providing competition and looking for customers that pay their bills promptly (which are still profitable due to the merchant fees), I can't see how banks that try to reinstitute annual fees will keep their remaining customers for long. Customers with strong credit profiles will likely still be able to procure a no fee credit card in numerous places and will simply take their business elsewhere.

Evan, you may be right, regarding this bill not limiting competition. But I'm not convinced. I guess my point was that any Government regulation on business (note: regardless of whether it's a good, needed regulation or not) by definition limits competition because it removes the ability of companies, to one degree or another, to differentiate themselves from each other.

That's one reason that many times you'll see businesses lining up to support more government regulation of their industries. It's common to see the big dogs (so-called members of the evil "Big [fill in the blank]" industries) supporting regulation. They can afford to absorb the cost of said regulation, while all their smaller competitors go out of business. Businesses are often times all for limiting competition.

As far as I can tell, it will make lending to higher risk customers less attractive and less profitable, by artificially restricting interest rate increases, etc. I think it's a bad bill, because people frozen out of credit cards are likely to turn to even more expensive financing outlets such as check cashing places and pawn shops.

And isn't that precisely the opposite of what the bill is intended to do?

Congress . . . *sigh*

I think we are largely in agreement, as I think we typically are on economic matters.

I agree totally that regulation is typically written to protect big companies and make it harder for the small to compete. As an example, in my own occupation, the various regulations and licensing requirements for CPA's does little but increase prices for customers and keep competition out.

And yes, I agree this bill will (as unfortunately is very typical for Congress) have the exact opposite effect of its intent of making credit more affordable, in particular for higher risk card holders. So yes, it will reduce competition in some areas - most notably those who are high credit risks.

My point was that the quotes in this article are wrong on where the impact of this bill will be. They directly assert that the people who routinely pay off their credit cards have (a) been getting a free ride (b) will now be asked to pay more. I don't think either of those assertions are true for the reasons I stated.

OK, folks, now that you have (absolutely correctly nailed down) the result, what will the media and most politicos say? Tell us here so that you can later say, "See, told ya."

Extra points for predicting what those same sources will say when, contrary to their assertions, your predictions turn out accurate.
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When first able to do so, I never used credit cards. Always paid cash. But when the cash discount disappeared, I saw no reason not to take advantage of the convenience of a card. Have and use only one. Have paid interest twice in several decades (confusion for whatever reason caused a day late mailing, something I'm sure the card companies bet on). Did get burned one other time: unexpectedly needed cash while half a continent away from home on business trip, but never carry much. But, all in all, since businesses not gonna give me cash discount but are willing to pay 4% for their convenience, I'm happy to concur for my convenience, plus 1.4% (average) rebate for airline miles (percentage x $25000 in card spending, saved up over couple years, buys $350 airline ticket)