Congress Mulls More Credit Card Restrictions, in Legislation Likely to Backfire on Consumers
Some in Congress want to impose interest rate ceilings on credit cards and restrictions on interchange fees. Australia tried the same thing, and it backfired, harming consumers by forcing credit card companies to increase annual fees on responsible credit cardholders and scale back rewards programs. (Ironically, recent interest rate hikes are partly the product of a law recently passed by Congress, the CARD Act, which forces responsible people to bear the costs of irresponsible borrowers.)
As law professor Todd Zywicki notes in the Wall Street Journal, the proposed legislation would harm both consumers and small businesses, since it would
reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users. The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards. Cardholders now carry and use multiple cards at little or no cost. The consequences for consumer choice and competition have been profound—card issuers compete for consumer business literally every time they open their wallet to make a purchase. Annual fees are essentially a tax on card-holding. Policies that produced a return of annual fees would strangle this process of competition by making it more expensive for consumers to hold multiple cards and to switch cards easily. Small businesses, three-quarters of which rely on credit cards, would also have to pay more to maintain access to multiple credit lines, stifling the most potent engine of economic recovery.
Earlier, Congress and the President misguidedly attempted to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act), that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.
All these bailouts are taking their toll on the economy. Economists and real estate experts say a $75 billion mortgage bailout program devised by the Obama administration is actually harming the economy, the housing market, and the construction industry.