This week I asked the Personal Finance Bloggers Brain Trust the following question and as always, the answers are thoughtful and insightful.
At the very time that our banks and Wall Street are asking and looking for a financial bailout they are condemning the ‘Credit Cardholders’ Bill of Rights. The American Bankers Association issued the following statement within minutes of HR 5244 passing in the House.
“The American Bankers Association is very disappointed by the action today of the House of Representatives. The so-called “Credit Cardholders’ Bill of Rights” (H.R. 5244), while well-intentioned, will increase the cost of credit for consumers and small businesses across the country, result in less access to credit for consumers and businesses alike, and may further roil the securities markets – all at a time when our economy can least afford it.
“Legislation resulting in higher prices to consumers makes little sense at any time, let alone when global markets face the degree of turmoil that confronts them today. By limiting their ability to manage risk in making loans, this bill will force lenders to increase prices for everyone to compensate for that added risk. That’s unfair.
“Sometimes things that appear attractive on the surface often come with too high a price tag. Increasing prices for consumers, reducing low-cost credit alternatives for small businesses, and causing more ripples in the securitization market make little sense.”
So let’s assume that the ABA argument that this consumer protection legislation will lead to an increased cost of credit for consumers and small businesses, when more consumer safeguards are put in place, will actually happen. Should we be afraid of costlier credit if in exchange consumers get greater consumer credit rights and protection against sudden rate changes, elimination of huge fees and clear credit disclosures?
Current credit card agreements are convoluted and subject to change at any given time. Form a consumer’s point of view, there is very little standardization across different credit card companies and sometimes not even across different credit cards under the same brand and bank. Most agreements tend to highly favor the credit issuer, which is understandable as it is their money.
However, there is very little in the way of consumer protection and current laws favor the credit issuing companies. Standardization would not hurt them beyond the initial compliance phase in which they would need to make all current agreements comply with any new regulations. Beyond the initial compliance phase, standardization would actually simplify their bookkeeping process and streamline their operations, potentially lowering costs. They may not be able to get consumers on as many hidden fees, but enough consumers will carry a balance that they will always remain profitable.
Should consumers be afraid of costlier credit? No. The credit card companies need our business and will always find a way to approve and make loans; that is their business. The credit industry is cutthroat enough that rates and lending will settle in at a level that remains profitable. Consumer credit rights and protections should be welcomed by all consumers as it is in their best interest. As long as they pay their bill on time it shouldn’t affect them in any negative way, and can only help them.
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There’s no point in being afraid of costlier credit – in the end, it benefits the consumer, even if initially it doesn’t appear that way.
First of all, the “Bill of Rights” that has been put in place is breath of fresh air in what has long been an industry fraught with malicious “small print” and abused and exploited customers. If these laws, which give consumers some safeguard against the tyranny of the credit companies, come with a price, I think we should all be willing to pay it – considering what the protection is worth.
I can’t see why having credit slightly less accessible (because of its cost) is a bad thing anyway. Sub-prime mortgage crisis, anyone? People who don’t qualify for credit shouldn’t be granted it, and I also think that most of those who do qualify really shouldn’t be extended much privilege either. Credit is a dangerous tool that many people abuse and that leads thousands to ruin. By making it costlier, perhaps fewer will try to borrow in the first place – making our businesses and consumers stronger in the end because they are operating on capital and not on credit.
The last thing anyone should want to do during an economic downturn is rely on credit. We would all be a lot more secure during an economic “crisis” if we were financially stable ourselves, and not so indebted every which way. A slow economy doesn’t much touch the man who is financially free. I think the ABA is blowing smoke because they don’t like the laws, period – not because they care at all about the individuals or small businesses.
This is of course my option, which at times tends to be rather extreme – especially when it comes to credit ;)
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Rights of any kind are not free – just look in any history book to confirm that.
And a “Credit Cardholders Bill of Rights” is long overdue.
Yet the timing of the bill is a bit scary.
I definitely have a little fear of the unknown these days …
Patrick Bryan – Living in Northern Ireland, Patrick helps people in a very different environment and economy but yet, mush is universal and much is the same. Visit Patrick’s Northern Ireland blog on debt.
Assuming the Bill of Rights will lead to increased costs of credit then I believe that this is a worthwhile trade-off against the current obscure regulations which apply to the US credit card industry. I have been quite shocked to read about the terms and practices permitted under the current legislation and I can’t believe that the most evolved economy in the world permits individuals to potentially be subjected to such terms and conditions as universal cross-default, any-time, any-reason interest rate changes, retroactive application of interest rates and two-cycle billing.
I believe that what the American consumer wants and deserves more than anything in their dealings with financial institutions is transparency and clarity. People need to know at the outset how much their credit card is likely to cost them – both in terms of maintenance fees, interest charges and also the costs of not maintaining the arrangement. Those fees should be well defined before the card is issued to the borrower, and proportionate to the costs incurred by the lender in providing those services. From what I can see this legislation is long overdue, and if the American credit card customer is going to pay more for their borrowings as a result of the Bill (which is highly debatable), then at least they will hopefully be aware of that cost from the outset, and the borrower will no longer face the fees and charges lottery of different card providers which currently prevails.
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Wow. I’m no expert in the field, but that statement really puts me off. Maybe it’s because i manage a customer service department myself, but i am all for up-front & bold credit disclosures – regardless of the consequences that may, or may not, come to fruition down the road. Whether we should be “afraid” or not is a totally separate issue. It’s like saying,
“I’m sorry grandpa, I can’t help walk you across the street because i’m afraid that there’s a chance i’ll get hit while doing so. And if i get hit then i can’t feed my family, and if i can’t feed my family they will die. So, as you can see, I’m too afraid of helping you because of what *may* happen”.
You walk that grandpa across the street because it is the RIGHT thing to do. Plain and simple.
Sure that’s a pretty colorful exaggeration there, but the fact of the matter is that we can’t lose sight of the MAIN objective here: helping the consumer. And if the end result IS higher costs for everyone, well that’s the way the cookie crumbles. The only difference here is that the consumer is now more educated, and will at least understand what the hell is going on.
(So my answer is that it doesn’t matter if we should be afraid of the consequences or not – we have to do what’s right.)
WC – A 27-year-old writer living in Chicago and writing about personal finance through The Writer’s Coin.
This is one of those “it depends on your philosophy” questions (aren’t they all?). Here’s what should happen in an ideal world: a massive educational push gets everyone interested in learning how to handle their credit cards and money in general so that it doesn’t matter what banks and credit cards do in terms of jacking up their rates and dinging them with fees.
If you play by the rules, you don’t have to pay for any of this. The problem is that the rules are too complex for some and that many people simply can’t survive without going over their limit or being late on a payment. This is at the crux of the whole thing. For those people, something needs to be done. Tightening of credit? Sure. I’m from Guatemala, where getting credit is a real hassle. People sometimes can’t/won’t pay back money they owe. Since the legal system is a mess, businesses know the odds of getting their money back are slim to none. So they don’t give loans and credit out very easily. Does that hamper small to mid-size businesses? Sure, but it’s better than having a whole bunch of people begging credit companies to please stop nailing them with fees.
At least I think so.
Steve Rhode – A personal finance blogger and founder of the Myvesta Foundation, a global scoial enterprise that helps people find solutions for money troubles. You can ask Steve your debt related question through GetOutOfDebt.org and he’ll help you for free.
I doubt that this increased regulation is going to have any impact on the actual cost of credit since as long as banks are competing for business they will offer attractive deals to win new customers.
The lack of regulation in protecting consumers has already lead to significantly costlier credit due to arbitrary increases in interest rates, term changes, phony arbitration, excessively high fees and all the other creditor actions which have been punitively put in place.
Ultimately the banks want a playing field that wholly favors them and that is understandable but self-regulation has not worked very well and if consumers are going to get some protection from unfair credit card company tactics the most effective approach would be federal law.
And let’s not forget that these legislative rights would not be a needed or considered if credit card companies had not already abused their positions with consumers.