Why the House's credit-card bill falls short
The House passed its version of credit card reform. From AP:
WASHINGTON (AP) — Propelled through the House by antibusiness sentiment in tough economic times, legislation putting new reins on the credit card industry now goes to the Senate, where the bill's prospects appear promising.The legislation, which has President Barack Obama's backing, would eliminate abrupt increases in interest rates and other practices decried by consumer advocates. It could be taken up in the Senate as early as next week.
Wednesday's column tells why it's not enough:
The liberal case for credit-card reform is well known: Greedy banks victimize card users with high interest rates and outrageous fees; Congress must crack down to make the system fair.Here is the less-known, conservative argument: Credit card complexity prevents users from making rational decisions about borrowing and spending, thus hurting the economy; Congress must intervene to make the system understandable.
Unfortunately, Congress might not take either course. Bills in the House and Senate would end the worst abuses but do little to stop stalker lending or cut the fine print.
Comments
I like your assessment of the conservative view. This is precisely the reason for so much rancor from the merchant community on interchange and anti-steering rules from Visa and MasterCard. In essence, banks and their card brands fix transaction pricing in clear violation of antitrust law, then prohibit merchants from price discrimination at the point of sale - creating a perverse system where cash customers fund card holder's airline miles. This violates any concept of free market systems. But it is a $50B p.a. cash cow to financials!
Posted by: Gray Taylor | May 1, 2009 10:31 AM
Gray: Thanks. I hadn't thought about things from the merchant's point of view, but your observation is spot on. Good information and price signals are essential to a functioning market; the credit-card behemoth kills price signals.
Posted by: Jay | May 1, 2009 10:37 AM
They may prohibit price discrimination, but as a practical matter it continues unabated, dispite my very clear complaints to them complete with names of merchants who imposed minimum sales requirements or price differentials. And they're quite blatant about it. Think I'm joking? Go to the Carroll Fuels station in Ruxton on Bellona Avenue--their cash prices are posted high as a come-on, their credit prices below that. I complained over a year ago. And by the way, I pay credit prices even though I use a debit card. I just choose "credit" as my payment option because I want to have to sign for my purchase, but it is processed immediately against my account so there is no "credit" being extended.
Posted by: Erin-JD | May 1, 2009 12:28 PM
Never thought of it from the "conservative" viewpoint. I had opened many credit cards at retail stores (Gap, Banana Republic, and the like) not realizing that this could hurt my credit score later on down the road. Now I'm scared to close all of the cards for fear of hurting my credit score! The financial industry is difficult to understand for the average consumer, and I hope that this can be remedied under the new administration.
Posted by: Malarie | May 1, 2009 12:40 PM
Malarie -- thanks for the comment. Economic conservatism is about letting markets work. Markets can't work if the customers have no idea what the costs and risks are.
Posted by: Jay | May 1, 2009 12:45 PM