“Credit Card Bill of Rights” Passed Today by the U.S. House of Representatives
Washington, D.C., April 30, 2009—The goal of simplifying
disclosure for consumers in credit card marketing, as professed by President
Obama and members of Congress, is one that I share. Unfortunately,
however, the so-called “credit card bill of rights” passed by the U.S.
House of Representatives today goes beyond disclosure and imposes paternalism
that limits consumers’ choices as well as sound risk-based pricing
practices by banks that issue credit cards. This will result in less availability
of credit and actually force card holders to pay higher
rates in many instances. The House did wisely, however, reject proposals
for price controls on merchant interchange fees – a naked effort to enrich
retailers at the expense of consumers – and the Senate should follow suit in
rejecting similar amendments.
Accepted or expected to be in votes today
Congress is codifying the unwise decision of the Federal Reserve last year to
ban so-called universal default. Under this longstanding practice, credit
card issuers would sometimes raise rates as a result of defaults on a
different credit card or loan, because these defaults may have signaled
a weakening in a consumer’s credit profile. This is a sensible risk management
practice similar to insurance companies raising rates for drivers who get
traffic tickets, even if it wasn’t while driving the car that was
insured. The issue is that the overall risk profile is changed because
of certain types of behavior, and issuers could price this into rates.
With the looming ban of this practice from the Fed rules –
even before this law was enacted – credit card issuers may have
reacted by limiting credit lines for all card holders because of the loss of
the ability to engage in this type of risk-based pricing. So responsible card
holders who never miss a payment are now paying the price for these misguided
rules and will likely pay a higher price with the implementation of these rules
being rushed in the bill that passed today.
“teaser” rates: The sharp
restriction of card issuers offering introductory rates for new
credit card holders – a lower rate that increases after a set
period – will most likely mean that consumers simply never get the benefit
of the lower rates and pay the higher rate right from the beginning.
Today, savvy consumers with good credit can sign up for new cards year after
year and continue the lower rates almost indefinitely. Consumer web sites and
other forums tell consumers effective methods to do this, and competition in
credit card issuing resulted in a variety of rates for consumer to choose
from. Deceptive or misleading practices can be dealt with without raising
rates for consumers, as the restrictions in this bill will do.
college students: 18-20 year-olds are old enough to fight for their
country and make other adult decisions. The bill’s restrictions on credit
card eligibility solely based on age are discriminatory and paternalistic. These
severe restrictions also go against the goal of establishing good credit for
young adults and teaching them to manage credit wisely.
The House Rules Committee’s rejection yesterday of the amendment by
Peter Welch (D-VT), and Bill Shuster (R-PA), to put back-door price
controls on merchant interchange fees was a wise decision in the best interests
of consumers. The amendment would have been a massive subsidy for some of the
nation’s biggest retailers at the expense of consumers and the community banks
and credit unions that issue credit cards. Experience with interchange fee
controls in Australia demonstrate that consumers pay for this cost shifting
through higher fees on the consumer side and fewer “rewards” such as airline
miles, with no corresponding decline in retail prices. Conservatives and
liberals in Congress, such as Debbie Wasserman Schultz (D-FL), have recognized
that price controls on interchange fees can harm consumer interests. The
House acted wisely in separating the issue of merchant fees from consumer fees,
and the Senate should follow suit and reject similar amendments.
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