Friday, May 22, 2009

Credit Card Holder Bill of Rights

The new administration is all set to bring in the new credit card policy. What they do not realize is that these rules will make people more indebted than before. Here is a simple analysis of a few key points:

1. No charges when card holders spend beyond credit limit.

Hmm. Lets think about this. The limit on my card is $2000, if I spend even a $1 more than that I have to pay $35 over the limit fee. So, I constantly have a running account in my head of how much I have spent on my card. If I feel like I am reaching the $1900 mark, I stop spending, because I do not want that $35 fee. If there was no fee, I would do nothing of that sort and keep using my credit card. Isn't that just common sense?

2. Card holders need to be given at least 45 day notice before fee and finance charge increases

The card companies already do that. They give you a 2 month notice before any changes to your card take effect. I have read the fine print in my card holder agreement. 

3. No arbitrary interest increases and universal charges. 

Hmm. My APR goes up if the card company perceives me as a bad credit risk. It is their way of protecting their money. Its just silly to ask the money lender to keep lending you money and not impose any penalties even though the chances of you defaulting on the loan are high. It is precisely this policy that leads to bankrupt government banks. 

People who do not know how to handle their money will not be better off by the government holding their hand. This is akin to saying that teenagers are risk prone so we should keep them under lock and key. That is a ridiculous idea. In the same way, these rules will only change the incentives in the credit card market. Even good credit risk people will find it more difficult to get a credit card, because the companies have no way of assessing risk through user fee and charges and APRs. So, they do not know if the person who is defaulting is doing so because he is a bad risk or because he is just taking advantage of the no penalty situation. 

1 comment:

Cantillon said...

I agree with the thrust of your post: this new regulation by the state will not have the intended economic effects because borrowers and lenders are not like pieces on a chess board. As Adam Smith reminded us, they have a principle of motion of their own.

But there is more. As the lenders face new hurdles to jump over and lower returns from lending, they will restrict their lending from what they would have lent in the absence of the new Federal restrictions, or raise their price for the lending, or both. The policymakers are unlikely to have intended to add yet another force for reducing consumer expenditure. But that is what they have done.