All’s Fair In Love and War Credit Card Regulation

When President Obama signed the Credit Card Accountability, Responsibility, and Disclosure Act into law in March of last year, the White House boasted that the new rules would “protect American credit card holders”—in part by banning “unfair rate increases.” But fair or not, the law has failed to protect many credit card users from sharply rising rates: On the contrary, it appears that the restrictions the law places on credit card companies are actually responsible for some of the recent spikes in credit card interest rates. From this morning’s Wall Street Journal:

New credit-card rules that took effect Sunday limit banks' ability to charge penalty fees. They come on top of rule changes earlier this year restricting issuers' ability to adjust rates on the fly. Issuers responded by pushing card rates to their highest level in nine years.

In the second quarter, the average interest rate on existing cards reached 14.7%, up from 13.1% a year earlier, according to research firm Synovate, a unit of Aegis Group PLC. That was the highest level since 2001.

Those figures look especially stark when measuring the gap between the prime rate—the benchmark against which card rates are set—and average credit-card rates. The current difference of 11.45 percentage points is the largest in at least 22 years, Synovate estimates....More increases are looming as card issuers respond to the new penalty-fee limits, says Ken Paterson, vice president of research at Mercator Advisory Group.

Because of the way the new rules limit how credit card companies can adjust rates for existing users, the higher rates are expected to primarily affect new users. To a significant degree, then, new credit card applicants are paying for existing users’ lower rates. Is this fair? Are consumers just now entering the credit card market being protected? No matter what, it’s clear that, thanks to the government, one class of users—those with existing accounts—is benefiting at the expense of another class.

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  • ||

    The national credit card is on the horizon. The IRS can collect the fees. The government takes people's money and then loans it back to them with interest. What could go wrong?

    Stimulating!

  • ||

    Post TARP, isn't that kind of what we are doing now?

  • ||

    Not really. Even a stunningly stupid idea like a national credit card still trusts people to spend money in a economically rational (self-interested) way.

    If the unions aren't guaranteed to get their cut, what's the point of stimulus?

  • robc||

    Like Sallie Mae, a national credit card wouldnt be bankruptible.

  • ||

    Great poster.

  • dave||

    Yeah, I have the exact same one hanging up in my house right now.

  • ||

    Who Could Possibly Have Forseen This?

    /snark

  • %||

    In other "unexpected" regulation news, the new mortgage compliance regulations that went into effect January 1st and were predicted by regulators to lower closing costs by an average of $750 have actually caused closing costs rise by an average of $750.

  • ||

    But, how could new regulations add cost? That's unpossible!

  • Brett L||

    I blame Bush.

  • ||

    Can we cancel the government's credit card? Whom do I call?

  • ||

    We need a big-ass pair of scissors.

  • Rich||

    the Credit Card Accountability, Responsibility, and Disclosure Act

    I would like the government to disclose how much it costs the taxpayer to come up with such clever names as "the Credit CARD Act".

  • ||

    Nothing. They guy who comes up with names was in the john.

  • They guy in the john||

    Yeah, I wanted to call it "the Fiscal Accountability Prevention For America Program Act" but that one slipped away.

  • creech||

    Schadenfreud: new credit users will tend to be younger people; younger people tended to give Obamassiah their votes. Enjoy. Oh, and no bitching in 20 to 30 years when the really big bills are presented against your 2008 indulgence.

  • ||

    New from Citibank: SchadenCarde.

  • ||

    Accepted everywhere they take Discover...oh, wait...damn.

  • ||

    TARP- $500 billion.
    Porkulus- $787 billion.
    ObamaCare- $1 trillion (tee hee!) for 6 years starting in 2014.

    The pleasure of spending my last 20-30 years of my life telling Obama voters, "I fucking told you what would happen!"- Priceless.

  • Liz||

    Citibank summarily canceled my old credit card and issued me a new one with new rules - I assume this is a loophole so that they can count me as a "new user".

  • ||

    Chase did the same thing to me... I don't ever carry a balance on it so I'm not really concerned.

  • ||

    News fees are a'comin'. Look for fees for paper statements and other creative workarounds.

    The banks are a little full of shit on this, too, but the fact is that the massive regulatory burden makes it harder to be a start-up in that business. That didn't use to be the case. Without real competition, the large providers can get away with all sorts of nonsense. And the federal regulators will help them do it.

  • ||

    while I agree that govt intervention tends to muck things up, unintended consequences and all that...the reality is that a credit card is nothing more than a loan...we still, to my knowledge, are not being forced to take out credit card loans.

  • ||

    Stop making sense.

  • ||

    Part of the issue, too, is that unsophisticated borrowers dominate the marketplace, which means that banks can get away with some silliness that no rational borrower would accept. And it means that the rest of us have fewer options in avoiding fees and other harsh terms.

    I agree, though, that no one is forcing anyone to borrow money. Well, aside from the government.

  • ||

    we still, to my knowledge, are not being forced to take out credit card loans.

    Just wait till you can't make ends meet after paying for your Obamacare-mandated insurance.

    (Maybe if i talk about how crazy the spam filter is, it will let this post through.)

  • ||

    (Maybe if i talk about how crazy the spam filter is, it will let this post through.)

    Did the trick.

  • ||

    Aside from the government, I said, which is borrowing more money than I'd need to start an empire bestriding the solar system.

  • ||

    my bad, i misread that part.

  • ||

    And when I say empire, I mean with each world colonized with its own space elevator. And pirates in the asteroids, whom the imperial government will secretly fund.

  • ||

    They've also saved us from being raped when I buy all those gift cards that I'm not forced to buy.

  • ||

    This will make a handy crisis for the government to "fix" somewhere down the road.

  • ||

    Ah, the laws of unintended consequences. Whoda thunk that regulations to curb "abuses" would lead to higher costs.

    Since I must travel for work and use a credit card for expenses, I guess I'm now subject to additional regulations to meet the desires of the Ruling Elite regarding Fairness to All.

    What wonderful occurrences.

  • ||

    It'll be nice when we're all back to cash-only. It'll be necessary to avoid the IRS Rape Gangs.

  • Brett L||

    I'm sure they'll have RFIDs in every piece of currency before that happens.

  • CrackertyAssCracker||

    If you dont want to pay the interest, don't borrow any money. I'm fine with that concept.

    But, I don't have a problem if the government says : "we aren't going to enforce contracts that give the lender complete discretion to arbitrarily change the interest rate on money already loaned".

  • Shannon Love||

    But, I don't have a problem if the government says : "we aren't going to enforce contracts that give the lender complete discretion to arbitrarily change the interest rate on money already loaned"

    Excellent idea. I would like you to give me $2000 line of credit with the following conditions: (1) I provide no collateral and no right of lien. (2) The repayment period is entirely open ended. (3) You have no means of compelling me to payback the loan at all beyond making a report to a credit agency. (4) I don't borrow the whole $2,000 in one chunk but instead I only borrow money a little bit at a time as I need it.

    Do we have a deal? What interest rate would charge and how much control over that rate would like to have?

    Before you answer, think about these situations:

    Suppose I borrow $1,000 from you and I'm pretty slow about paying it back. Do you want to charge me the same rate for next $1,000 as for the first?

    Suppose I just don't pay back the $1,000 very quickly. That is $1,000 you don't have to make other loans or investments with. You have to collect at least as much in interest on the outstanding $1,000 as you could make elsewhere with it or you go in the hole. What if interest rates change or other opportunities arise in the years it takes me to pay it back? Are you going to charge the same interest on $1,000 indefinitely regardless of how much it cost you? If you do, what initial interest rate are you going to lock in at the start? It has to be high enough to cover all you possible future loses.

    What if you notice that I'm not paying a lot of my bills? What if it starts to look like I may take a very long time to pay you back or never pay you back at all. Wouldn't it be a reasonable idea to start increasing the interest rate on the existing loan in hope of getting something back in a timely fashion?

    Do we still have a deal?

    Credit cards are loans but they are very unusual loans. The lender assumes much more risk than more conventional loans and they charge accordingly. If you want a fixed rate, you can get it one from thousands of different issuers but you will have to pay up front for the risk that the bank assumes in giving you such an open ended loan.

    The variable interest rate lets people with little money but good discipline get card loans at lower rates. As long as they watch their credit and pay in a timely fashion they only have to pay for market changes, some of which go down. Variable rates are hell on people with poor discipline (like my younger self) but that the price of personal freedom.

  • CrackertyAssCracker||

    Jeez Shannon, you went off on me. Sorry, but, I don't have time to give your reply the depth of argument that it deserves. And I mean that in a totally non snarky way.

    So you'll have to settle for this lame ass response:

    All I'm saying is that just because something is written down in contract form, doesn't mean the government should necessarily enforce it. E.g. slavery contracts: I'm against them. Likewise, if a credit card company changes interest on debt that I already have from 9.9% to 1000000000000000% overnight, and I all of the sudden owe them the entire GDP, they aren't getting anything out of me except an extended middle finger. Even if that was allowed by the letter of the contract. Now, maybe 9.9% to 14.3% isn't so unreasonable, but now we are just haggling.

    If you want to tell me that the most recent "reform" was a total pile of dog crap, I'll have no problem believing that.

  • Shannon Love||

    My point was that there are real market reasons why credit card issuers use variable rates. If you were lending money on the same basis as credit card issuers, you would do the same thing.

    More generally, I think you will find that a government that can pick and choose which contracts it will enforce is much more destructive that bad contracts that people voluntarily take.

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