The Problems with Credit Card Reform
I’ve been in some debates with other personal finance bloggers about the merits of the bill that the Senate passed yesterday. This is the bill that “regulates” the credit card industry. In this case, “regulates” means that the federal government is now setting some key terms of the agreement between the bank and the cardholder. I don’t like it. Here are my issues:
I don’t think it will be too long before an entire new federal agency is created to regulate consumer financial products of all kinds. (I think it will be called the “Federal We Will Take Care of Your Money Because You Won’t Agency.” ) That will add cost for everyone (except, of course, the lawyers). It will also allow consumers to blissfully resume their borrow and spend ways, assuming that whatever problems they cause, the government will fix them and/or tax the rest of us to make up the difference.
2. For the most part, the new credit card rules are intended to benefit cardholders who carry balances and therefore incur interest charges, late fees, and over-limit fees. No one should carry a balance on their credit card. If you do, you are overspending. It’s that simple. If you don’t carry a balance, you don’t worry about late fees and you don’t care what the interest rate is. Stated another way, the new credit card rules are intended to benefit people who actually shouldn’t even be using credit cards.
3. Because the new rules place limits on how much the irresponsible cardholders can be forced to pay for their carelessness and cluelessness, those people who use cards responsibly (by not carrying balances) are being punished. The banks will be forced to spread the risk around to all cardholders. This means fewer no-fee cards and diminished paybacks on rewards cards. The government’s actions are interfering with the service provider’s ability to price risk into individual accounts. Whenever that happens, we all pay more.
Imagine having to pay more for your health insurance or life insurance if insurance companies are not allowed to charge higher premiums for smokers or obese people. It’s the same principle.
4. The one regulatory benefit that could have come out of this bill is a provision that allows merchants to grant discounts to those who pay with cash. Right now, the agreements between merchants and VISA, etc. actually prohibit this practice. There was an attempt to include this in the bill but it was beaten back by the card industry lobbyists.
The card companies want to discourage the use of cash so they use merchant agreements to interfere with freedom in retail pricing. If the government really wanted to benefit its consumers, it would have smashed that with a sledgehammer. Instead, the government ignored it. This means that cash buyers will continue to pay higher prices to compensate for the sins of the card addicts. It also means that the government is being complicit in encouraging the continued use and abuse of consumer credit.
The credit card and credit score industries are now more than ever dictating your financial lives. The government is their number one cheerleader, as long as it gets a piece of the control action. Which, of course, it is now doing.
Some pundits think that one consequence of this new legislation will be that it will be harder for some consumers to even obtain credit cards. Oh really? How long do you think the geniuses in Washington will put up with that? There will cries of “fairness” and “economic justice.” Everyone deserves a credit card, don’t they? It’s a sign of financial intelligence and maturity, just like that McMansion, big mortgage, and $500 car payments.
Mr. ToughMoneyLove could be wrong about all of this but I don’t think so. Maybe you will tell me otherwise. Bring it.