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Credit Cardholder’s Bill of Attainder

Wednesday, January 28, 2009
By Dan

[DISCLAIMER: I work in the credit card industry, so I try to avoid posting on topics that directly impact my industry.  Suffice it to assume I have a personal financial stake in this idiocy coming to an end.  Then again, so do you.]

Chuck “I never met a bank I didn’t destroy” Schumer has introduced legislation designed to further restrict and regulate the credit card industry.  The legislation, which is similar to legislation introduced by Representative Carolyn Maloney and another banking super genius, Chris Dodd, would accelerate newly proposed Federal banking regulations and add further restrictions to the credit card industry.

In a nutshell, the legislation and the new regulations would make the following changes to how credit card companies do business:

  • Your interest rate cannot be changed by your bank unless you miss a payment with that bank for more than 30 days.
  • If your credit rating goes in the toilet, but you still make your payments with this bank, this bank won’t be able to increase your interest rate.
  • Similarly, even promotional rates (like 0% rates) cannot be changed unless you’re 30 days or more overdue.
  • You will have at least 21 days’ grace before interest starts accruing.
  • The mountain of disclosure and fine print you currently don’t read will increase, so you’ll not be reading more information than you didn’t read before.

You may be thinking, well, how can that be bad?  Those mean old credit card companies have been skinning us for years!  Well, here’s the thing: put yourself in their shoes under these new rules.  Imagine you’re in the business of loaning money to people, and there are 1000 people you’re targeting.  You know that about 50 of them will be deadbeats; 50 will fall behind occasionally, but otherwise pay; 100 will pay just the minimum, 600 will pay more than the minimum and the remaining 200 will pay their balance in full each month.  You would like to charge those people and average of, say, 12% interest to make up for the losses on the 5% who won’t pay even the principle of what they owe.  What you don’t know, however, is who falls into what category.

Under the old system, you could start your customers off with a lower interest rate (say 10%), and if someone became more risky, you could raise their rate.  Those who maintain good credit will keep the lower rate, and on average, you would be charging the amount you needed to.  But now, the government is saying you have to lock in the rate, pretty much for the life of the account.  So what do you think will happen?  If you think credit card companies are going to stick with the lower rate to start, you have not been paying attention.  So the net result of this “protection” is that the average credit cardholder will see their interest rate jump at least a few percentage points.

What else will happen?  Daily Danet prophesizes:

  • Interest rates will jump 3-5% almost immediately.
  • Zero % interest rate offers will disappear.
  • Credit card companies will be far less reluctant to extend credit.
  • Consumers, paying higher cost of credit, will spend less.
  • Banks will make less money (but that’s okay, I’m sure a bailout is in the works already).
  • Your points program will not be so generous anymore.
  • Your bank will start charging you additional fees to offset their additional costs.
  • The U.S. economy, which is driven by consumerism will stagnate far longer than it would otherwise.

If you think I’m making this up, ask an Australian.  In 2003 the Reserve Bank of Australia enacted a similar “do-gooder” policy, and guess what happened?  Consumers bore the brunt of the increased costs and the broader economy suffered.  In fact, it took nearly four years for consumer spending to return to 2003 levels.

Is this really the time to put the brakes on consumer spending?

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2 Responses to “Credit Cardholder’s Bill of Attainder”

  1. [...] immense machine, how it works, and the other cogs you should know about.  As I’ve mentioned before, I work in the industry, though not for a bank, so take my opinion as informed (and a little [...]

  2. [...] some lay of the land: as I have already mentioned here, and here, I am not a fan of the newly passed Credit Cardholders Bill of Rights. I work in the [...]


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