Congress Just Raised Our Credit Card Fees
Technically, it was the companies which raised their fees. But they did so to anticipate new legislative restrictions on fees taking effect. Congress wanted to cut costs for consumers, but ended up costing them instead.
Credit card companies are raising interest rates and fees seven months before new rules go into effect that will limit their ability to do so, much to the irritation of Congress and consumer advocates.
Chase, for instance, will raise the minimum payment required of some of its customers from 2 percent to 5 percent of the statement balance starting in August. Chase and Discover have increased the maximum fee charged for transferring a balance to the card to 5 percent of the amount, up from 3 and 4 percent, respectively. Bank of America last month raised the transaction fee for balance transfers and cash advances from 3 to 4 percent. Card issuers including Bank of America and Citi also continue to cut limits and hike up rates, which they have been doing with more frequency since January.
“This is a common practice and will continue to be common, because issuers can do these things for really no reason until February,” said John Ulzheimer, president of consumer education for Credit.com, which tracks the industry. “It’s what I call the Credit Card Trifecta — lower limits, higher rates, higher minimum payments.”
It’s not just the top card issuers making changes. Atlanta-based InfiBank, for example, will raise the minimum annual percentage rate it charges nearly all of its customers in September “in order to more effectively manage the profitability of our credit card account portfolio in a very challenging economic environment,” said spokesman Kevin C. Langin.
The flurry of activity, which the banks say is necessary to shore up their revenue losses, has irked members of Congress, who passed a new credit card law, which was signed by President Obama in May. The law, among other things, would prevent card companies from raising rates on existing balances unless the borrower was at least 60 days late and would require the original rate to be restored if payments are received on time for six months. The law would also require banks to get customers’ permission before allowing them to go over their limits, for which they would have to pay a fee.
One hates to think of what additional “help” Congress plans on providing for us in the future.
Of Course, It Is the Banks’ Fault!
Congress is off on another crusade, to save Americans from credit cards. People get into debt, run up big fees, generally feel abused, and complain to their elected officials. Never mind the obvious convenience, which is why credit cards have become an indispensable part of American commerce. Legislators plan on micro-managing the credit terms which may be offered across America.
“We like credit cards — they are valuable vehicles for many people,” said Senator Christopher J. Dodd, Democrat of Connecticut, the chairman of the Senate banking committee and author of the measure now being considered by the Senate. “It’s when these vehicles are being abused by the card issuers at the expense of the consumers that we must step in and change the rules.”
“Abused by the card issuers.” Of course. The very same card issuers who kidnapped people, forced consumers to apply for cards at gunpoint, and convinced merchants to refuse to accept checks or cash in order to force everyone to pull out “plastic.” The poor helpless consumers who had nothing to do with the fact that they wandered amidst America’s cathedrals of consumption buying wiz-bang electronic goods, furniture, CDs, clothes, and more. The stuff just magically showed up in their homes, with a charge being entered against them against their will. It’s all the card issuers’ fault!
But then, Sen. Dodd’s assumption that consumers are not responsible for their actions fits his legislative style: no one is ever responsible for anything. Least of all the residents of Capitol Hill.
Now Is Not the Time to Reduce Credit Card Availability
With the House having passed credit card legislation and the Senate scheduled to take up its own bill this week, one questions keeps coming back to me: What’s the hurry?
We are in the midst of a recession, which will not turn around until consumer spending turns around—so why reduce the availability of consumer credit now? And the Federal Reserve has already proposed a rule that would address many of Congress’ supposed concerns. The Fed rule will be implemented July 2010. Were Congress to get a bill to the president by Memorial Day, as he has asked, the Federal Reserve and the industry still couldn’t implement it before maybe January, if they were lucky.
Congress should keep in mind that credit cards have been a significant source of consumer liquidity during this downturn. While few of us want to have to cover our basic living expenses on our credit card, that option is certainly better than going without those basic needs. The wide availability of credit cards has helped to significantly maintain some level of consumer purchasing, even while confidence and other indicators have nosedived.
It was the massive under-pricing of risk, often at the urging of Washington, that brought on our current financial market crisis. To now pressure credit card companies not to raise their fees or more accurately price credit risk, will only reduce the availability of credit while undermining the financial viability of the companies, ultimately prolonging the recession and potentially increasing the cost of bank bailouts to the taxpayer.
As Treasury Secretary Timothy Geithner has repeatedly said, some of the biggest credit card issuers will not be allowed to fail (think Citibank, American Express, Capital One, KepCorp) should they suffer significant losses to their credit card portfolios. Will taxpayers ultimately be the ones covering those losses?
Congress should also further examine the wisdom of restricting credit to college students under the age of 21. Outside of the obvious age discrimination, why treat adults between the ages of 18 and 21 any differently from those above 21? The basic premise of college is making sacrifices today in order to have a wealthier tomorrow—accordingly being able to borrow against that better tomorrow should be an option for any college student. Just as some small number of college students don’t benefit from college, some don’t benefit from credit cards, but throwing the “baby out with the bathwater” hardly seems the idea solution.
Love the Cards, Hate the Card Issuers
God hates the sin but loves the sinner, we are told. Americans have a similar attitude towards credit cards. They love the cards but hate the card issuers.
Naturally, President Barack Obama has picked up on this sentiment and wants the credit card companies to be “fair.” Reports the Washington Post:
The Obama administration yesterday called for an end to unfair credit card industry practices such as retroactive interest rate increases for any reason, late-fee traps that penalize borrowers with weekend or middle-of-the-day deadlines and teaser rates that last less than six months.
In a written statement released by the Treasury Department, the administration outlined practices it would like Congress to reform as it considers two bills that would crack down on the industry. One proposal would force card companies to apply payments above the minimum amount to the highest interest rate debt. To crack down on over-limit fees, the administration would also like Congress to require card companies to get customers’ permission to set up accounts so transactions over the limit can still be processed.
There are lots of reasons to criticize the practices of credit card companies, but many of the rules are simply mechanisms to charge riskier borrowers more. If you pay off your bill every month, you don’t pay the extra fees and interest. If you are more disorganized, short on cash, or both, you pay more.
Higher charges make it possible to provide more credit to more people. Of course, politicians believe in the latter but not the former. Banks should provide credit cards, make loans, and issue mortgages to everyone, irrespective of credit standing, at rates akin to those charged Bill Gates. Anything more is viewed as a variant of “predatory” lending deserving condemnation.
Maybe it would be best for some people not to buy so much on credit, but that isn’t — at least so far — the government’s decision. However, it would be more honest if government branded people with the Scarlet C and banned them from borrowing than prohibiting companies from charging higher rates and fees to reflect higher credit risks.
The credit card debate is stranger than most in Washington. Listening to critics you’d think that the card companies were dragooning people off the streets, forcing them at gunpoint to sign up for cards, and demanding that they spend money else their children will be kidnapped and sold into slavery. Precisely who was forced to accept and use these terrible cards with their terrible terms? No one.
Instead of posturing as defenders of the body politic, crusading politicians should, as my friend Don Boudreaux of George Mason University suggested, give up their day jobs and start credit card companies. These entrepreneurs then could offer consumers better cards with less onerous terms, making everyone better off.
Any takers?
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