Today, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 goes into effect and is being hailed as a boon for consumers. But the law passed last May is already showing a slew of unintended consequences.
Congress should carefully look at the negative effects for many consumers and entrepreneurs and revise the law’s flawed provisions.
It should also strongly resist pseudo-populist policy proposals that would further distort the credit market, such as direct interest rate caps or price controls on merchant interchange fees that would force consumers to subsidize the retail sector.
The CARD Act, in addition to reducing availability of credit at a time when policymakers are trying to get credit flowing, is ironically resulting in many card holders paying higher rates, as it forces thrifty consumers to indirectly subsidize borrowers with high balances.
Responsible credit card holders who pay off most of their bills at the end of the month may also now be hit with the return of annual fees and a reduction in reward programs to make up the costs from the restrictions on risk-based pricing for higher-risk card holders.
Even The New York Times said last May that the law may create “a penalty for thrift.”
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. And the law does contain some fairly reasonable provisions regarding statements to consumers of how much they owe and rules for payment due dates.
Unfortunately, however, this so-called “credit card holder bill of rights” goes beyond disclosure and imposes paternalism that limits consumers’ choices as well as sound risk-based pricing practices by banks and credit unions that issue credit cards.
The law codifies the unwise decision of the Federal Reserve 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.
The CARD Act’s restriction on adult younger than 21 obtaining credit cards without the cosigning of a parent is discriminatory and paternalistic. Those 18 to 20 years old are considered old enough to fight for their country and make other adult decisions, and they should be able to decide if they are ready for a credit card.
This restriction on credit card eligibility solely based on age goes against the goal of establishing good credit for young adults and teaching them to manage credit wisely.
These provisions may also have unintended effects of forcing college students to work more hours to get cash — and compromise their studies — if their access to credit is cut off.
Members of Congress also didn’t serve consumers well in playing games in moving up the date of implementation.
With any new rules, firms need a reasonable amount time to adjust their pricing mechanisms and technology to the changes. The Federal Reserve rules that the law codifies were originally set by the agency to go into effect July 1. Congress moved up that date to today.
As a result of firms scrambling to meet these shifting deadlines, more card holders had accounts closed and credit limits reduced than likely otherwise would have. Many politicians unfortunately responded by further demagoguing the issue and threatening to move up the date in an even more unreasonable amount of time.
One piece of good news for consumers was that in debating the law, congressional leaders did wisely reject retailer lobbyists’ call for backdoor price controls on merchant interchange fees. Instead, the law ordered the Government Accountability Office to conduct a study of this proposal’s effect.
In November, the GAO issued its report, telling Congress what many economists and other researchers have been saying for years: that interchange fee controls amount to 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.
The GAO report pointed out that experience with interchange fee controls in Australia demonstrates 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.
Policymakers should also keep in mind that users of credit cards include not just consumers but small entrepreneurs.
Start-up firms have limited collateral, and often credit cards offer the only path to getting a business off the ground.
The Kauffman Foundation of Kansas City, Mo., has found that almost half of all small businesses use personal credit cards for financing.
One of these small entrepreneurs was Sergey Brin, who used his personal credit cards as a college student in the 1990s to start the Web search engine that is today known as Google.