Many observers have seen a crisis approaching in the credit card industry, with personal debt and defaults climbing during this recession and the industry’s willingness to raise rates, charge fees for bills paid by phone, and exact penalties for late or missed payments.

On Tuesday, the Senate passed a bill by a vote of 90 – 5 that would limit the $960 billion industry’s ability to raise rates and charge fees. The next day, the House concurred, passing an equivalent measure by a vote of 361 – 64. The legislation will probably reach President Barack Obama’s desk by Memorial Day.

President Obama is expected to sign the bill into law. The president met yesterday with representatives of the industry; he had been pressuring them to end practices often deemed abusive of consumers.

The new law would prohibit banks and credit card companies from raising interest rates on cardholders’ balances unless a payment is at least 60 days late. Then, if the cardholder pays on time for the next six months, the law would compel the company to restore the earlier interest rate. It would also require banks and credit card companies to notify cardholders of any interest rate increase 45 days in advance (as opposed to the 15 days now in effect) — duplicating a measure already scheduled to take effect on July 1, 2010 in response to new regulations recently issued by the Federal Reserve. Cardholders could not raise rates on new accounts for one year.

Another provision of the new law would require lenders to apply consumer payments to the debt that has the highest interest rate, in those cases of credit cards with more than one interest rate. It would also bar lenders from charging fees to customers paying by phone or online, and it would bar them from establishing early morning deadlines for payment that would lead to late fees for customers paying by phone or online on the afternoon of the due date.

Finally, applicants for credit under the age of 21 would need to have their applications signed by someone over 21, proving they could pay or that a parent or guardian would pay just in case they default.

The measure is popular among consumers, but is not without its critics who believe that in the long run it will harm the people it is intended to help. Edward L. Yingling, chief executive of the American Bankers Association, warned: “This bill fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk.” Talking to the Washington Post, he explained, “It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate.”

In other words, credit cards might become more difficult to obtain as available credit is reduced by approximately $2 billion. This would make it harder for new small businesses and low-income borrowers deemed “risky” to establish a credit line. Those with weak credit histories would be hardest hit.

Moreover, since the credit card industry makes roughly $15 billion a year from penalty fees, and one fifth of cardholders carrying a debt pay interest rates above 20 percent, if revenue available from these sources dries up, card issuers will turn to those who pay off their credit cards each month; it is they who might find themselves saddled with new fees. Special offers and rewards programs will likely be cancelled.

A minor controversy surrounding this bill is an unrelated amendment allowing visitors to national parks to carry loaded guns, which many Democrats oppose. Legislators from the House and Senate are presently working to reconcile the differences between the two versions of the bill. If President Obama signs it, it will go into effect February 2010, except for the clause requiring lenders to notify cardholders of rate increases which will go into effect in August.

Steven Yates earned his Ph.D. in philosophy in 1987. He is the author of one book, Civil Wrongs: What Went Wrong With Affirmative Action (San Francisco: ICS Press, 1994) and numerous articles both in academic journals and elsewhere. He has taught philosophy at Clemson University, Auburn University, Wofford College, the University of South Carolina, Southern Wesleyan University--Columbia, and Midlands Technical College, and has held fellowships with or worked on projects with the Institute for Humane Studies, the Heritage Foundation, the Heartland Institute, and the Acton Institute for Religion and Liberty.
 

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Pat Henry said:

FedGuv a bad credit risk Hey, speaking of bad credit histories, is there anything we can do with the Federal government, which never pays off its debt, and forces taxpayers and all who use FRNs to pay for it with inflation (devaluation)? The Fed itself has been using the entire US economy as its own private "pump and dump" (where you and buddies buy up stock to make the price rise, then sell it for a profit, leaving buyers holding the deflated bag). Geithner, Bernanke/Greenspan, and US Treasury friends may now be preparing for the final dump. So there may be a bright side after all: we may be forced--for survival--to get back to trading value for value instead of using worthless paper, as in barter, and specie (real money). For those wanting to make the change voluntarily before your un-Constitutional "dollars" are hyper-inflated to near zero, here's a calculator to help, until all prices are denominated by weights: www.SilverAndGoldAreMoney.com

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May 23, 2009
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