Credit Card Price Controls Harm Consumers

The Wall Street Journal editorial got it exactly right:

The Federal Reserve cut rates to historic lows Tuesday, but today it plans to vote to tighten consumer credit — taking away with one hand what it gives with the other. On the agenda is a rule-making that would impose, for the first time, what amount to federal price controls on credit cards.

That’s what the Fed’s proposed amendment to Regulation AA would do. In changes pushed by consumerist groups and grand-standing lawmakers, the proposal would tell banks how to divide payments on a credit card account when there are different balances on that account. The changes would also prohibit card issuers from increasing the interest rate on an outstanding balance even if the borrower is less creditworthy. And the proposed rules wouldn’t allow banks to charge consumers for going over their credit limit if it’s because of a hold on the account for an expected cost, say, of a hotel or a rental car.

In trying to lower their credit card exposure risk, banks have already tightened up their requirements for issuing credit cards. They’ve also cut credit limits of lots of borrowers. This new proposal will tighten up credit even more and shift the increased costs to the good borrowers — those who stay within their limits and make their payments by the due date.

Guess who’s been one of the big advocates for these changes? No other than Rep. Barney Frank (D-MA), who also pushed for Fannie and Freddie to expand their portfolio of high-risk mortgage loans in the name of the Community Reinvestment Act. We all know what came of that policy.