Government Credit Card Regulations Welcome An End to Cardholder Rewards and Low Interest Rates
Democrats are striking another blow to doom consumer credit and further stifle the practices of free trade. The problem is that they want to control how and when a credit card company may increase interest rates, even preventing card companies from increasing rates on cardholders who are 30 days past due. Consumers; knowing that they can be 30 days late without fear of interest rate increases, will have little incentive to prevent escalating credit card debt. Some cardholders will likely get further into debt and will suffer more with rolled-over debt than if they were motivated to pay timely.
The problem with government credit card control doesn't stop there... If credit card companies are forbidden to increase interest rates on late paying cardholders, it's likely that some (if not all) will no longer offer low introductory rates, or will automatically increase percentages and/or reduce credit limits to protect profits against losses. For example, a credit card company that once offered a $5,000 credit limit card with a 19% interest rate to people with some credit problems, may change that offer to new applicants to a $3,000 credit limit only and at a higher, 21% interest rate.
Did consumers 'win' as democrats proclaim? Not hardly. If anyone wins, it's the credit card companies who; forced by legislatures, must start off charging higher than normal interest rates since they cannot adjust (raise) rates nor lower credit limits on late paying cardholders who are a high risk of default.
The Senate decided on Tuesday to regulate credit card rate increases and fees. They claim their objective is to give voters some breathing room amid a recession that has left hundreds of thousands of Americans jobless or facing foreclosure.
The House was on track to pass the measure as early as Wednesday, paving the way for President Barack Obama to see the bill on his desk by week's end.
Oblivious to reality, Sen Christopher Dodd, D-Conn, chairman of the Banking Committee, stated: "This is a victory for every American consumer who has ever suffered at the hands of a credit card company."
Credit Card Cartoon
If enacted into law as expected, the bill woul give the credit card industry nine months to change the way it does business: Lenders would have to post their credit card agreements on the Internet (in addition to their current print) and let customers pay their bills online or by phone without an added fee. This latter requirement will likely drive up credit card company costs, which will be passed back to the consumer in other forms such as annual fees (or higher annual fees) and/or yet higher interest rates. Card companies would also have to give consumers a chance to spare themselves from over-the-limit fees and provide 45 days notice and an explanation before interest rates are increased.
Some of these changes are already on track to take effect in July 2010, under new rules being imposed by the Federal Reserve. But the Senate bill would put these changes into law and go further in restricting the types of bank fees and who can get a card.
One way democrat control will stifle credit, is that it requires those under 21 who seek a credit card to FIRST prove they can repay the money or that a parent or guardian is willing to pay off their debt if they default.
Bankers warned the measure would restrict credit at a time when Americans need it most. They defended their existing interest rates and fees on grounds that their business - lending money to consumers with no collateral and little more than a promise to pay it back - is very risky.
"What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky," said Edward Yingling, president and CEO of the American Bankers Association.
"It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate," Yingling added.
Wisely voting against the Senate measure were Republican Senators Lamar Alexander of Tennessee, Robert Bennett of Utah, Jon Kyl of Arizona and John Thune of South Dakota, and Democratic Sen. Tim Johnson of South Dakota.
So why are some senators pushing this legislation that may well spell doom for obtaining credit at favorable rates? Because they want their voters to think they are actively looking after their interests; when reality-be-told, quite the opposite is likely to happen.
A nail-in-the-coffin is limiting a practice known as "universal default," when a lender increases a cardholder's interest rate on an existing balance because the customer is late paying bills and is a risk of default. Under the new legislation, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance. Since credit card companies would have to wait until then to increase rates, why not go ahead and start new customers on a super-high rate to offset losses caused by current cardholders whom they cannot increase rates on? That's what card companies will be forced to do.
Even then, the credit card company would be required to restore the previous, lower rate after six months if the cardholder pays the minimum balance on time.
House Democratic leaders said they planned to move quickly... apparently too quickly and without much forethought. Last month, the House approved, by 357-70, a similar credit card bill by Democratic Representative. Carolyn Maloney.
The credit card companies seem to have few friends on Capitol Hill these days, with even the most business-minded lawmakers feigning concern for consumers in the hopes for votes.
The House was expected to pass, possibly as early as Wednesday, a bill that would enact stifling new restrictions on the industry, including a requirement that customers penalized by higher interest rates because they missed a payment are given a chance to reclaim their lower rate after six months.
President Barack Obama is expected to sign the bill into law. Treasury Secretary Timothy Geithner on Tuesday said the bill would "create a more fair, transparent and simple consumer credit market." Translation: Everyone will now have to pay high interest rates (not just bad credit people), and there will be lower credit limits as well.
Of the five senators sympathetic to card lenders, two were from South Dakota, where thousands of jobs depend on the industry. Republican Sen. John Thune estimated the bill would cost as many as 5,000 jobs in his home state.
Sen. Tim Johnson, also from South Dakota and the only Democrat to oppose the bill, agreed it could be devastating.
"This is a time when millions of consumers are already facing lower credit limits and higher interest rates on their credit cards because of decreasing credit availability and continued economic instability," he said.
Also opposing the bill were Republican Sens. Lamar Alexander of Tennessee, Robert Bennett of Utah and Jon Kyl of Arizona.
But their voices were drowned out by lawmakers who said their offices had received dozens of complaints from voters.
Senate Banking Committee Chairman Christopher Dodd, D-Dem., on Wednesday ignored warnings that credit will be more scarce if Congress approves the bill.
Calling Tuesday's Senate vote "a great day for consumers," Dodd also said people still must handle their money responsibly and pay their bills on time. But he also said the measure was "a long time coming, a long time overdue."
Dodd said any assertion that credit will be hard to get is absurd, "a little like Chicken Little."
The Pew Health Group estimates that 82 percent of cards available to consumers include the stipulation that the cardholder's rate can increase to any amount indefinitely if the lender determines the person is too much of a credit risk. Consumer advocates say it is these types of practices that can bury consumers in debt if they make one mistake. But why encourage consumers to increase debt, by allowing them 60 days to run up bills before having to make a payment and then getting a higher interest rate to boot?
Under the new bill, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance. Even then, the lender would be required to restore the previous, lower rate after six months if the cardholder pays the minimum balance on time.
Consumers also would have to receive 45 days' notice and an explanation before their interest rate was increased.
Some of these changes, including the 45-day notice requirement, are already on track to take effect in July 2010 under new rules being imposed by the Federal Reserve. But the legislation would put these changes into law and go further in restricting the types of bank fees and who could get a card.
For example, the Senate bill requires those under 21 who seek a credit card to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default.
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