Washington, D.C., April 30, 2009
The goal of simplifying disclosure for consumers in credit card marketing, as professed by President Obama and members of Congress, is one that we share. Unfortunately, however, the so-called "credit card bill of rights" passed by the U.S. House of Representatives today goes beyond disclosure and imposes paternalism that limits consumers' choices as well as sound risk-based pricing practices by banks that issue credit cards. This will result in less availability of credit and actually force cardholders to pay higher rates in many instances. The House did wisely, however, reject proposals for price controls on merchant interchange fees — a naked effort to enrich retailers at the expense of consumers— and the Senate should follow suit in rejecting similar amendments.
Accepted or expected to be in upcoming votes
 Universal Default
Congress is codifying the unwise decision of the Federal Reserve last year 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.
With the looming ban of this practice from the Fed rules — even before this law was enacted — credit card issuers may have reacted by limiting credit lines for all cardholders because of the loss of the ability to engage in this type of risk-based pricing. So responsible cardholders who never miss a payment are now paying the price for these misguided rules and will likely pay a higher price with the implementation of these rules being rushed in the bill that passed today.
Introductory or "teaser" rates
The sharprestriction of card issuers offering introductory rates for new credit cardholders— a lower rate that increases after a set period— will most likely mean that consumers simply never get the benefit of the lower rates and pay the higher rate right from the beginning. Today, savvy consumers with good credit can sign-up for new cards year after year and continue the lower rates almost indefinitely. Consumer web sites and other forums tell consumers effective methods to do this, and competitionÊin credit card issuing resulted in a variety of rates for consumer to choose from. Deceptive or misleading practices can be dealt with without raising rates for consumers, as the restrictions in this bill will do.
Restrictions on college students
18-20 year-olds are old enough to fight for their country and make other adult decisions. The bill's restrictions on credit card eligibility solely based on age are discriminatory and paternalistic. These severe restrictions also go against the goal of establishing good credit for young adults and teaching them to manage credit wisely.
Defeated
Interchange fees
The House Rules Committee's rejection yesterday of the amendment by Peter Welch (D-VT), and Bill Shuster (R-PA), to put back-door price controls on merchant interchange fees was a wise decision in the best interests of consumers.
The amendment would have been 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. Experience with interchange fee controls in Australia demonstrate 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. Conservatives and liberals in Congress, such as Debbie Wasserman Schultz (D-FL), have recognized that price controls on interchange fees can harm consumer interests. The House acted wisely in separating the issue of merchant fees from consumer fees, and the Senate should follow suit and reject similar amendments.  |
