A recent SmartMoney article suggests that 0% offers could soon become a thing of the past, due to the impending passage of the Credit Cardholders’ Bill of Rights Act. Credit card issuers claim that should the proposed changes pass, they may not be able to afford to extend these promos anymore. Are these just scare tactics on the part of card issuers or is there substance to the threat?

Changes mean fewer ways to profit off of customers
Make no mistake about it, the “credit card bill of rights” will cut severely into banks’ profits. Every proposed change, from eliminating universal default and double cycle billing, to restricting the frequency of over-the-limit fees, will make each customer less potentially profitable for issuers.

One change in particular–requiring banks to apply payments proportionately to card balances with different interest rates–directly makes offering balance transfers with low teaser rates more expensive to issuers. Currently, these low intro rates are subsidized by many unwary consumers, who do not realize that credit card companies apply payments first to the lowest interest rate balances, causing the effective interest rate to be much higher than they expect.

As part of testimony in Congress on the bill, Discover’s Carlos Minetti, Executive Vice President of Cardmember Services and Consumer Banking, directly addressed this effect:

By prolonging the time period during which zero or low-APR loan balances will be repaid, this changes the economics of offering low-APR introductory or balance transfer offers. It will result in the elimination or reduced availability of balance transfer offers, depriving consumers of their benefits. The Federal Reserve’s proposed rule on this issue – prominent disclosure when promotional offers are made about how payment will be allocated – is a preferable approach that informs consumers about potential costs without depriving them of low-APR credit offers.

Impact of the credit crunch
Even without passage of this bill, we have seen a significant drop-off in the availability of intro rate balance transfer offers as banks face the credit crisis, so I have little reason to doubt that these offers would grow even more uncommon should the bill become law.

Will they completely disappear? I tend to think not, as they are a very strong marketing hook. Even today, it’s hard to see a credit card ad that doesn’t trumpet a 0% APR. So it makes sense from that perspective to keep some incarnation of 0% deals alive, as long as it is financially viable. Unfortunately what is more likely to happen is that, in addition to becoming more scarce, intro balance transfer offers will become increasingly less attractive in their terms.