Credit card legislation is a hot topic in Washington, D.C. right now. Last week, President Obama’s administration met with leaders of the largest credit card companies. The President made clear both during his campaign and since taken office that he favors credit card legislation. The Fed has already approved credit card regulations that will take effect in 2010. And their are several bills pending in Congress that would reform the industry.
Credit card oversight is favored by many. James from Dual Income No Kids wrote a compelling piece in favor of the credit card reforms. At a macro level, he argues that such reform will help reduce the American consumer’s reliance on credit. Over at the Wallet, a WSJ blog, reporter Jane J. Kim quotes one consumer advocacy analyst as describing the legislation as critical during this economic crisis:
They’re getting the extra squeeze from the credit card companies of higher interest rates, higher fees and lower credit limits. The provisions in this legislation are certainly very urgent in this economic crisis.
There is, however, a very dark side to this legislation. Much like the flak the oil industry took last summer, the credit card industry seems to be the cause célèbre of the day. But whenever government steps in believing it knows how people should conduct business better than the market does, unintended and often costly consequences follow.
Perhaps the most significant aspect of the reform is the government’s control of interest rates. The Fed’s rules and pending legislation would prevent card companies from increasing interest rates on existing card balances. It would also prohibit them from increasing rates for reasons not directly related to the cardholder’s activity with the specific credit card at issue. These “reforms” are appealing to many, but the problem is that the cost of credit will go up significantly as the government takes away flexibility from card issuers.
If a card issuer is restricted in the right to change interest rates, they will set rates higher at the start. It’s also likely that they will limit credit card rewards, such as cash back, balance transfers or travel rewards. “Basically, riskier borrowers will be subsidized by people who manage their credit well,” says says Nessa Feddis, vice president and senior counsel for the American Bankers Association, a leading industry trade group. In fact, Chase, the largest card issuer in the United States, predicts that the average annual percentage rate will rise by nearly 2 percentage points.
