In a rapidly evolving financial landscape, a recent development in the U.S. Senate could significantly affect American consumers. The Credit Card Competition Act, proposed by Senators Durbin and Marshall, might soon be attached to the upcoming Defense Authorization Act. But what does this mean for you and your financial future?
This legislation seeks to limit credit card rewards and the variety of advertising options. Its implications are far-reaching, affecting access to credit, rewards programs, security, and more. So, let’s delve into the potential impacts of this Act and why you need to be aware of them.
The Impact on Credit Card Rewards
Consumers heavily rely on credit card rewards. Interchange – the fee paid between banks for the acceptance of card-based transactions – directly funds these rewards. These benefits, worth a staggering $60 billion each year, could vanish if this proposal is enacted.
About 84% of cardholders have access to rewards, and more than 60% of consumers with subprime credit use a rewards card. If these rewards disappear, there could be a rush to redeem accumulated rewards before their elimination, leading to a cash crunch for partners like airlines and hotels that rely on these programs’ revenue.
Limited Access to Credit
The Act could affect the availability of credit, especially for those with less-than-perfect credit scores. Reduced revenue from these credit card programs may force issuers to make hard choices, including tightening credit, increasing fees and interest rates, or eliminating products altogether.
For instance, non-rewards card products targeting consumers new to credit or those with lower credit scores largely rely on interchange revenue. If this funding decreases, issuers may have to raise consumer fees or discontinue these products.
Effects on Minority Communities
The proposal could reduce credit access for low-income consumers, including those in minority communities. Similar to the Durbin Amendment, this proposal could raise banking costs, leading to the elimination of free checking accounts and increased fees and account minimums.
A 2021 study found that the Durbin Amendment’s expansion to credit cards could deny access to credit cards for millions of Black and Hispanic Americans. This potential reduction in credit access might push these borrowers towards more expensive credit products, such as payday loans.
Harming Small Businesses
Small businesses, too, might bear the brunt of this Act. Unlike large retailers, small merchants often lack the resources and technology to determine how and where to route their transactions. They also lack the bargaining power to negotiate with multiple networks. This can further disadvantage small businesses while big retailers grow bigger.
Moreover, rewards programs encourage customers to spend more when shopping, compared to cash or debit. The average non-cash transaction is $112, compared to $22 for cash. If reward programs diminish or disappear, small businesses might lose out.
We encourage you to stay informed about these developments and how they might affect you. This legislation is a critical reminder of why financial literacy and awareness are vital.
For more information and an opportunity to voice your concerns, visit HandsOffMyRewards.
Disclaimer: This content is designed for general informational purposes. Always consult with a professional for personalized advice.
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