CreditGumbo.com: How do you characterize the new law which was so rapidly passed by the house and senate, at President Obama’s urging?
mw: This is the most important piece of lending legislation that has come out of Washington in decades. After years of costly abuse at the hands of the credit card companies, Congress is finally doing its job to reign in their egregious re-pricing practices.
dg: Here we go again, the same politicians that used our tax dollars to bail out banks that made bad loans and homebuyers who got in over their heads have now passed a law that’s going to limit the borrowing options for people who have made the decision to use their credit cards responsibly.
CG.com: On what basis are the two of you so far apart on your view of the Act?
mw: The credit card companies have perfected the art of luring in unsuspecting consumers with ridiculously low interest rates, convincing cardholders to take balance transfers and to buy things they can’t afford, only to turn around, sometimes only a few months later, and raise the interest rates. The banks knew from the start that they couldn’t sustain those low rates and make any money. The consumer was set up right from the start.
To make matters worse, in many cases, the higher interest rates also resulted in an increase in the minimum payment requirement on the account. The higher payment sometimes caused the customer to miss a payment or two, which provided a reason for other lenders to increase interest rates on the consumer’s other credit cards.
dg: Mark, you are making sweeping generalizations that are misleading if not downright dangerous. I have never paid a dime of interest to a credit card company. I have enjoyed the 25 to 60 day grace period I get after making a purchase. I’ve also enjoyed lots of great trips on the free airline miles that I earned by using my credit card to purchase things I would have bought anyway. And, I got to do most of this without even paying an annual fee. Now, I, like tens of millions of other responsible Americans, will see these benefits curtailed, if not completely eliminated.
mw: By the way, the current law needed to be amended. The so-called 15-day notification period prior to an interest rate increase is something of a joke. Who can reasonably be expected to take the time to read through the pages of miniscule type to figure out that their rate is being increased? Even if you did read it, you’d need a lawyer to help you figure out what it says. The new law puts credit card companies on the same playing field as everyone else, you make a deal under certain terms and you are required to stick with it.
dg: And who benefits from these changes? Most likely it will be those who chose to use credit irresponsibly.
Credit card companies set their pricing based on the risk of the borrower. As the risk increases, as evidenced by things like higher usage of credit and late payments, the issuers raise the interest rates in order to offset the increased losses they expect to incur.
Sound familiar? It’s very much like the reason your auto insurance goes up when you get a speeding ticket. Without the ability to appropriately adjust interest rates for customers that demonstrated riskier behaviors, the card companies will have to turn to other sources for income. That’s very likely to result in annual fees, the elimination of rewards programs and, maybe even the elimination of grace periods. That’s right, you may have to pay interest from the day you make a purchase. This is definitely a loss for the responsible users of credit cards.
CG.com: Do the two of you agree on anything with respect to the interest rate pricing section of the Credit CARD Act of 2009?
dg and mw: Yes, there is much we agree on. Credit cards have historically been high profit margin businesses at most banks. These profits are arguably justified when you consider that unsecured lending is, by its nature, a very risky business. Unlike mortgage or automobile lending, where the loan is collateralized, the credit card business has no ability to repossess an asset if the customer fails to repay his or her debt.
Some of the practices employed by the credit card issuers clearly exacted stiff penalties for relatively minor cardholder infractions. The new legislation should limit these tactics in the future. However, the banks cannot readily walk away from the profits historically derived from the credit card business. Instead, they will employ new techniques to ensure they make the necessary profits. We have no doubt this will result in a very different landscape than the one that exists today. Not all consumers will benefit from these changes.
Labels: APR Increases, Credit Card, Credit Card Law
