Why Federal Credit Card Rate Caps Will Burn Consumers

By , Editor-in-chief
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Consumers have been up in arms over escalating rates on their credit cards. They've complained to lenders, researched options on other credit card terms, and sent a loud and clear message to their Congressional representatives.

President Obama signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 last May, and, in response to the promise of tighter restrictions, credit card companies scrambled to boost revenues by establishing rate increases prior to the February 2010 date for enacting the legislation. The new law will ban so-called arbitrary rate increases on interest, establishing guidelines for regulating "usury", and enforcing statutes that determine when an arbitrary rate exceeds the law.

The lender's immediate increases sparked further responses on the Hill and many legislators are now considering a 16 percent maximum rate for credit cards along with a $15 cap on late payment fees. Consumers beware: credit card companies may find another tactic to respond to new laws and protect their profits.

A Balancing Act: Regulating Credit Card Usury

Credit card companies view any cap tactics as restraint of trade. And while a credit card rate cap looks good to consumers at the outset, the inevitable response by banks and lenders may be more unpleasant that people imagine:

Since credit card companies more easily extend the best credit terms to consumers with excellent credit scores, you can expect fewer loans made to credit card holders with poor--or even average--credit. That means fewer risks for credit card companies even as their rates are capped. And the net result is that average borrowers and those with risky credit may have to look elsewhere to borrow.

Even consumers with good or excellent credit histories may pay the price for the caps, since the companies must shift terms to those who can shoulder the losses created by interest capping. That means, without high rates currently levied on average or risk borrowers, credit companies could raise the rates on borrowers who presently enjoy seven-to-ten percent rates. Bye-bye.

You can also expect your fees to go up as credit card companies could use higher fees to offset a loss in earnings through the Credit CARD Act. The party may be over.
History Repeats Itself with Increased Fees

Down under in Australia six years ago, the central bank forced credit card companies to slice interchange fees in half, resulting in a less-than 1 percent charge. Retailers had argued for years that the fees they paid banks for merchant account transactions was unfair.

Consequently, Australian banks fought back by cutting perks, rewards programs, and slashed grace periods between a date of sale and the initiation of interest. For those who kept rewards programs, the companies hiked annual fees. Profit-taking seeks its own level. The average annual fee for an Australian Gold Card, The New York Times reports, is $140 Australian per year, increased from the $98 Australian rates charged before the new laws took effect.

Is There a Better Way Toward Reform?

Certainly regulations to curb and penalize unfair lending practices are a great beginning. But someone is going to have to pay for the caps imposed by the credit CARD Act, and it looks like it's going to be consumers--who are already cash-strapped--and merchants, who are likely to pass the increased costs on to consumers.

The root cause goes untreated as we continue to believe in a culture of borrowing and spending. Irresponsible parents teach their children the power of plastic without educating them about consequences. Annual interest rates on outrageous payday loans, borrowing against anticipated tax returns, and pawn loans can exceed 400 percent. Capping is a small measure that can backfire while our deepest credit problems go unchecked.

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  1. Ellsworth Hazelrig
    January 16, 2010 - 10:39 pm
    American plastic as we know it
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  2. Roulette Spielen
    January 09, 2010 - 6:08 pm
    Great idea, but will this work over the long run?
      Reply »  
  3. Bephen Stiko
    January 08, 2010 - 1:26 am
    There are some underlying assumptions in your article that deserve to be questioned... Are so called "rewards" cards anything more than a marketing gimmick? They have the aura of coupon clipping which is just a way to do price discrimination based on how much people value their time. In the long run, price discrimination is a net loss for consumers as a group, maybe a system that makes price discrimination for credit less common will be a net benefit for consumers.
    Another question that should be considered is whether extremely easy credit is really a good thing for our society. For well over a decade there have been substantial criticisms that extremely easy credit leads people to live beyond their means. Ideally everyone would have the financial knowledge and will power to avoid overspending in the first place, but in the real world that seems extremely unlikely to happen on its own. Maybe the tightening of credit availability will be a net benefit for society if it reduces irresponsible spending.
      Reply »  
  4. Anthony
    January 05, 2010 - 9:46 pm
    All the above makes perfects sense. I, however, would add, that parents are not the only ones responsible for teaching children irresponsible fiscal management. Congress, which passed the largest spending increase in decades, and continues to spend more than it makes, bears a great deal of responsibility. Steny Hoyer is great for congratulating himself in his "Paygo" bill, requiring Congress to spend no more than it takes in, firgetting to mention that: (1) there is no cap on taxing, (2) it is offered after all the wild spending of this past year, (3) Congress had repeatedly shown (in fact, even in this year's Health Care Bill) that it is very good at manipulating the figures to show revenue and spending balances where there are none. Real reform would require human beings, especially business executives, to be less greedy, advertisers to be more honest, and society to stop trying to beat out the Jones. But, since that will never happen, Congress should have considered setting simple and strict regulations when it doled out the billions to the banks, allowing banks to "opt out" if they deigned not to comply with the rules. Of course, simply doing nothing or, better yet, giving every taxpayer a $700 bonus would have stimulated the economy far better than the current trillion dollar giveaway has. Besides, Congress would not have had to go back and correct so many of their mistakes.
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  5. piyatida juntrakul
    January 05, 2010 - 12:02 am
    what can we do ? The credit card company will try to protect their benefit without worrring their customers. It was a little Chic in their Palm....We just felt so stupid. This Government don't know the roll tictac of the creditor.
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  6. Sadie
    January 03, 2010 - 8:30 pm
    I don't see anything bad about any of these 'consequences.' As someone who had a very low interest rate, only to see every rate that wasn't a fixed promo increase to near 30% and credit lines cut to just above the balance, I think the benefits of a cap on interest and fees would benefit more than harm. Companies should not be allowed to raise a rate without reason, and now many of us are going to be stuck with these astronomical charges.
    The 'harm' of higher interest rates for low risk and ineligibility of people with higher risks isn't much harm at all. The first would encourage less use of credit, and the second would prevent it entirely for those who can't afford it. It is time for all of us to stop living beyond our means.
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  7. John Sullivan
    January 02, 2010 - 5:46 pm
    I really like this blog. Please continue the great work. Regards!!!
      Reply »