This week with wide support and much fanfare, the US Senate passed a bill called the “Credit Cardholders’ Bill of Rights Act of 2009″, touted as a measure to “protect” us against the “evil greedy” credit card companies. Let’s get the the basic facts straight though. No one is required to use a credit card. No one is required to carry balances over each month. No one is required to spend up to the limit of five or more credit cards. I do realize emergencies happen, but I have yet to see any study or report that shows a large amount of credit card use to be anything but conspicuous consumption. Our problem with credit is not that we have tons of unprecedented emergencies, but simply that we spend too much. The problem with credit card balances are not the credit card company’s: we own that one.
That is not to say that credit card companies have our best interests (bad pun, har, hard) in mind, either. After all they are in the business of giving unsecured lines of credit to the general population, and currently they are in trouble as an industry for giving out credit lines to too many people with lousy credit histories. They’ve been poorly run and I have little sympathy for their self created problems. If they can’t be responsible in who they choose as customers, then good riddance. Go bankrupt for all I care.
So now, with the economy in shambles and politicians eager to earn brownie points with consumers who on average carry around $11,000 on credit cards, comes the warm and snuggly sounding bill that gives us consumers a new “bill of rights.” Credit card companies will now be restricted in rate increases, for how long they can increase rates, be required to make the fine print more obvious, and show people how long it will take to pay off their balances with the minimum payments. In other words, this bill is designed to limit revenue generated by credit card companies and provide information that people already have access to if they were responsible with their finances. While I don’t agree that the government needs to get involved in this, let’s all be honest with what this bill is really doing. If you believe this is indeed where government should intercede, fine. I understand where you’re coming from. I just don’t agree with it, and allow to explain why.
The credit card companies are going to react in some way. They’re going to react in ways Congress and Obama certainly haven’t considered. Let’s look at a few obvious ones that have already been thrown out there:
* Return of the annual fee
* A paring back of reward programs
* Fewer promotional rates and offers
* Job cuts
However, I think there is one change that might well happen but no one seems to have discussed. Credit card companies might in fact, raise credit limits. This might seem counter intuitive, but it seems to me to play into human behavior. Consumers will not change behavior because of this bill. They might because of the economy, but not because of this bill. Credit card companies will need to make up the revenue somewhere, so why not increase limits and take the interest off of larger balances. I honestly think that is where this bill creates incentives. Instead of seeing rates of 18% on $3,000 balances, you’ll see 9% on $6,000.
Using a calculator from bankrate.com, a $3,000 balance at 18% paying the monthly minimum, will cost you $1716.00 in interest. Using the other scenario, you will pay $1355 in interest. While the credit card company took a 21% hit in revenue, you went into twice as much debt. At 11% interest rate is where the credit card company gets back to the same amount. Surely, a credit line of $6,000 at 11% will seem like a great deal compared to $3,000 at 18%. The former looks like the deal of someone who is well off and is responsible, the latter perhaps the average consumer, but they pay off the same.
I think it is an almost certainty that the credit card companies will react in some way that will in the long term be more detrimental to consumers than if the government had never gotten involved. There will be unintended consequences not listed in this article, too. The government is removing a moral hazard from the consumer-credit card company relationship, and history has shown us that usually leads to unintended disasters. I wish our legislators would take more seriously the cause and effect of changing the incentives.
On a side note, I applaud the news networks for pointing out the completely unrelated rider attached to the bill allowing loaded handguns into national parks. However, I wish they would do it more often, that is, pointing out unrelated legislation, and not just when it’s about an issue they are either strongly for (Fox News) or strongly against (MSNBC).
