What struck me was that "warning" by the industry. Similar to what you wrote, Lion, in your post on Planet Money (by the way, why'd you take that down?); in contrast to the common knowledge among every analyst that expanding credit is always and in every way a good thing,Lawmakers in the US Senate have voted overwhelmingly in favour of a bill that puts new restrictions on the credit card industry.
The bill would curb sudden interest rate increases and hidden fees.
The industry has warned that the measure could backfire, leading banks to issue fewer credit cards thus making it harder to get credit. (source: BBC)
this really doesn't sound so bad. I also don't really buy the argument that putting limits on rate fluctuations is going to restrict borrowing all that much. Sure, it will make credit card companies more risk averse when it comes to interest rate fluctuations, but if the last few years have taught us anything, there's a derivative for everything these days and in the derivative game, hedging against interest rate changes is old school.
My main point: if credit card companies are a little bit more hesitant to dish out credit to the average consumer, that sounds to me like, fundamentally, a good thing. Speaking as a person who does not and never has owned a credit card, having plastic access to a line of credit should not be the litmus test for financial independence. If a person doesn't have a job and/or has a history of bad credit, that person probably shouldn't be getting a credit card in the first place and I wouldn't mind it one bit if American Express or Mastercard approached those potential client with tighter fists.The bill would prevent companies from raising interest rates on existing balances unless a card holder was 60 days behind, and then it would require the rate to be restored to its previous level if payments were on time for six months.
Card holders would have to be told of rate increases 45 days in advance and it would also make it harder for people aged under 21 to be issued with credit cards.
As it is now, in the absence of this kind of regulation, the costs of tighter credit have been transferred whole sale onto the credit card holders. By putting a bit of that potential cost on the purveyors of credit, they might think twice before pushing plastic on everybody.
But not knowing much about the credit card industry, this is just my knee jerking. I'm sure the story will continue to develop.
Posts
i think part of the credit card industry's argument against any regulation of interest rates is that flexibility allows price segmentation based on the financial strength of their customers. the way things stand now, the story goes, one can extend credit at a high, variable interest rate to people who are greater risks, and, by profiting from them, offer lower rates to others more prudent. i haven't seen any statistics to prove that this arrangement actually works, and i don't see what keeps them from gouging everybody equally whenever they feel like. as an example of this, my father, who i believe has had to rely on credit cards more heavily in the past, is nevertheless very regular in making payments and has never let his outstanding obligations exceed four figures. this did not prevent the interest rate on his card from more than doubling in recent months to 30%.
ReplyDeleteto invert the credit card companies' logic, in my father's case, the poor repayment history of risky customers (or else the fact that so many have simply been dragged underwater by the unsoundness of the economy) has translated into higher rates for all customers, as the issuers struggle to shore up their balance sheets. this unfairly penalizes everybody in the system, and it does so because the companies themselves knowingly assumed more risk than they could properly spread out over their customer pool. regulation that limits access to credit, then, would be beneficial to everybody--even to the companies themselves, as they are saved from the short-sightedness of their decisions and can rely on a steadier, if less inflated, income stream.