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Credit Law May Hurt Retailers And Consumers

Consumer spending has witnessed timid growth in recent months, according to data from the U.S. Department of Commerce.

This may not be enough for some retailers, whose bottom lines have been significantly damaged by recent reform aimed at shielding consumers from deceptive or unfair credit lending practices, according to a recent report by Reuters. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 began taking effect last year, with a new wave of provisions slated for this summer.

The legislation requires that lenders give at least 45 days' advance notice before increasing interest rates or fees. Starting this August 22, credit card companies will also be required to review any interest rate or fee hikes issued since January 1, 2009, and determine that any late or overdraft fees are proportionate to the dollar size of the consumer's violation. Overdraft fees can currently be as high as $39, even when consumers only overextend their accounts by a few dollars.

"We understand there was a great desire for credit card reform," Mallory Duncan, general counsel for the National Retail Federation, was quoted as saying.

Many of these reforms will also apply to store-brand credit cards, which account for a significant portion of a retailer's business. Companies often offer reward programs to give customers incentives for their loyalty. This increases the use of store credit - from which retailers are able to collect fees and interest.

Such sales currently account for more than half of purchases at Signet Jewelers Ltd., according to the report. The company's operating income reached about $179.9 million last year, and could suffer by some $20 million thanks to the Credit CARD Act. Similar experiences may be witnessed at Seattle-based retailer Nordstrom. The company earned $369 million through interest rates and fees from its credit card business in 2009, a figure five times higher than that reported in 2005.

"The final details of financial system reform legislation, if any, are highly uncertain at this time," Nordstrom wrote in a recent filing. "Depending on the nature and extent of any reforms, our credit business could be significantly adversely affected."

While aimed at protecting consumers from unfair credit practices, the legislation may also cut in to the amount of rewards they receive by both retailers and lenders, according to a recent report by SmartMoney.com. Many companies hope to minimize the law's negative effects on their revenue by decreasing the purchasing value of points received through reward programs.