Monday, October 6, 2008

Credit Cardholders’ Bill of Rights Would Not Be Good For Consumers

Interesting piece in today's Wall Street Journal opinion section. The author argues that, given the current financial turmoil, the last thing consumers need right now is more costly credit and less access to the credit markets. The new Credit Cardholders' Bill of Rights, the piece argues, would not be good for consumers.

From the Journal: The Credit Card Congress

The Maloney bill would also dictate how creditors allocate payments against balances. Where credit balances are subject to different interest rates -- e.g., zero-percent interest for a balance transfer, but 12% for new purchases -- the legislation would ban the current common practice of directing payments toward the lower interest rate balance first.

The likely result will be fewer zero-percent promotional rates that individuals and small businesses rely on to reduce borrowing costs. Lenders now have an incentive to extend these low rate offers -- which allow borrowing at below-market rates -- because they know these balances will be repaid first. Remove that incentive and we'll almost certainly see fewer promotional rate offers.

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Anonymous said...

There are many areas of the legislation that are not friendly to those that use credit responsibly or are perhaps in the CreditWhore category.

I foresee a return to many cards having higher APR's and annual fees just like we used to see up until roughly the mid-1990's. I remember in the late 80's that almost every card came with a 19.92% APR no matter what the score was (scores would be disclosed by the local banker on loan applications done in person, as was the norm pre-internet).

The only one that benefits by the 'reform' are those that default or cannot be bothered to read terms and conditions associated with the card.

Credit Matters said...

Anon, thanks for the comment.

While I mostly agree with your last paragraph, I don't completely agree. I suspect that you and I both know people who have been snared by the credit card companies -- because of some term in the agreement (even one that was fully disclosed) that was very consumer unfriendly.

But, by and large, yes, I think that the deadbeat credit card customer does remarkably well with the Credit Cardholders' Bill of Rights.

Don Miguel said...

One thing I can get behind in the legislation is tying the hands of creditors to reprice on existing balances absent delinquency of the account with that creditor. Every time some limits are proposed to curb the abuses by the industry, they cry wolf and claim they'll take their ball and go home. I hope Congress calls their bluff this time and we get to see how willing they really are to leave money on the table.

The Lion said...

Nice piece, CM. I have to wonder, though, if this opinion was completely of the writer's own thought process. I guess I always get a little skeptical of any opinion that seems (on the surface at least) to be against legislation that is supposed to help consumers. That is just the big left leaning liberal conspiracy theorist in me :)

erchambers said...

It seems to me that real 0% offers are dead already. I consider removing the ability of the CCCs to reprice already accumulated debt a bigger win than the loss of the (now really at least 3%) 0% offers.

Anonymous said...

The 'consumers' helped the most by this piece of trash legislation are not those who use credit responsibly.

I have never understood why people snivel about changes to terms when those very terms and the ability to change them were CLEARLY delineated in the Terms and Conditions agreed to before the very first use of the credit card product. Why should the issuer/lender be viewed as the evil one when the consumer CHOSE not to read and understand what they were agreeing to by and through the use of the product???

And anyone who views anything as being worth the loss of 0% offers is probably not someone who uses those offers to their advantage...loss of 0% or other low APR (and not all have fees attached to them) offers is NEVER acceptable.

erchambers said...

I don't understand where the anonymous poster before me and the CC companies are coming from when they bellyache about not being able to reprice already incurred debt. No other forms of debt allow this. The only times things like mortgages blow up is when the companies are deregulated to the point of having free reign. Well, their lax lending standards are going to have a blow up with CC debt here sooner rather than later. Amex is already circling the toilet. No idea if they'll make it as an independent company.

However, removing the ability of these companies to reprice debt will most likely reduce the instances of BK and defaults. There have been many cases where someone may have been able to pull out of a down time with too much debt, but one creditor pushes them over the edge by increasing their APR from say 10% to 30% and then they are no longer able to make the minimum payments, and as they become late on that one account, the rest of their accounts follow suit by raising interest, and eventually this person BK7s all of the debt and the only thing the creditors get is the profit and loss write off whereas before the customer may have paid the debt.

I agree with the bill that Universal Default and the repricing of old debt without delinquency need to be done away with. It is totally anti-consumer to say otherwise, IMO. This bill will probably increase the profitability and security of these companies, anyway, and they know it. The would rather make less money and have the ability to attack customers.

Credit Matters said...

Let me start from the bottom and work my way up.

Erchambers, the part about repricing risk (on already accumulated debt) is where you and I agree. It's like a unilaterial modification in a contract. It requires no mutual assent at all. There, we agree. That's something that I would enjoy seeing removed.

I absolutely do not mind being able to reprice current risk -- by repricing future purchases. If someone looks damn risky right now I don't mind the rate getting ratcheted upward. But the new rate would apply to the future purchases.

Credit Matters said...

I know another reason why I not too passionate about this Bill. I am someone who pays in full. I don't allow the card companies to get any leverage over me. As a result, the current credit card policies have little to no impact on me.

Perhaps I should be a little more sympathetic to those who aren't in my situation.

That said, the card companies say that those who are the lower rung, in terms of credit quality, will be the ones who get locked out in the future. Seems to me that this Bill is geared toward those very customers.

If that's the case, then the very people who would be helped most are the very ones who won't be getting new credit -- or less credit -- in the future.

The irony is interesting.

erchambers said...

If this means that they can't turn the card off, then I agree that it goes too far.

"(1) IN GENERAL.—No creditor may change any term of the contract or agreement applicable with respect to any credit card account of the consumer under an open end consumer credit plan until renewal of the contract or agreement except for the specific material reasons, and subject to specific limitations, that are contained in the contract or agreement with respect to such term at the time the account is opened."

I don't know what "specific material reasons, and subject to specific limitations" means.

However, if a CCC is still allowed to turn off a card, which appears to be the case, and I can't imagine that they can't, I can't fault the rest of what I've read. If they can turn the card off, they can reduce their risk to the current outstanding balance. If the cardholder becomes delinquent, then the rate on the outstanding balance can be increased.

Credit Matters said...

Chambers, good point. They could always shut the card down. That's one way to reduce their risk. On the other hand, these card companies are addicted to these fat profits that come from sky-high interest rates. They'd probably still like to leave the account open. But that's a business decision, which we won't concern ourselves with here.

As to the "specific material reasons" language, there should be a definition some place that defines that term. If there is not, then we have an ambiguous term that needs to be dealt with. Card companies could abuse a term like that if there is no qualifying language. I imagine the card companies will spell it out in their new card agreements.

Far Left Texas said...

From the article: "With few exceptions, companies would be prevented from raising interest rates on existing balances, even if the cardholder has become less creditworthy."

OK - the time to change interest rates is BEFORE the money has been lent. If my credit rating drops, my house payments don't increase - but a new house loan would be more expensive. If my credit rating drops, there are no changes to my existing car payments, but a new car loan would be at a higher interest rate.

And - a person with a 500 FICO score would get a home loan at 10.5% while a person with an 800 FICO would pay 5.75% (from the website).

For a car loan, a 500 score gets you a 16% APR and an 800 score gets you a 6.25% APR.

So - going from a perfect to a dead credit score jumps your interest by 5% for a house and 10% for a car. Missing one payment on a credit card would drop your FICO by maybe a dozen or two points, yet cause the interest to go up 20+%.

Essentially, the punishment does not fit the crime. The credit card companies won't play nice and raise your rates just a little, they have to take them all the way to the top.

Again, congress wouldn't be involved if BofA did one or two percent ratejacks, it's their own greed that brings this about.

From the article again: "Lenders now have an incentive to extend these low rate offers -- which allow borrowing at below-market rates -- because they know these balances will be repaid first."

No - the lenders' incentive is the actuary tables that show them what percentage of consumers will have a single "oops" and be kicked from 0 to 29.99. If they would have maybe scaled it, going from 0 to 5 to 10 to 15 to 20 to 25 and then to 29.99, the consumers would not have the right to complain as loudly as they do now. The punishment doesn't fit the crime.

And what other business would even consider being allowed to apply payments in a manner least beneficial to the consumer? Can you imagine a mortgage company having rules prohibiting putting extra payment amounts towards principle? What would happen if they forced extra payments to advance escrow fees?

Once again, it is the credit card companies' greed that is causing legislative action. They could have gotten away with requiring the consumer to specify where payments were to be applied. Or they could have made it a proportional thing - the high interest payments would still last as long as the low interest payments.

But no, they had to take the "all-or-nothing" approach. They chose the method that gave themselves the highest profits and showed no consideration for the consumer.

So now, they can't stand before congress and say, "We are being as fair as we can." They can only stand there and say, "We are screwing the consumer over as hard as possible every single chance we get."

Credit Matters said...

Excellent post, FLT.


Don Miguel said...

FLT, you said it much better than I could have. In a nutshell, "Banks, you're stuck with the interest rate at which you lent on money already lent, but you're free to increase the rate to reflect perceived risk on new loans."

Credit Matters said...

DM, exactly. Reprice for future purchases.

Older purchases are off limits. You're stuck with the interest rate that was in effect when the purchase was made.

Anonymous said...

Just as I do not believe every high school senior is college material I do not believe we have a Constitutional right to credit. The Credit Cardholder Bill of Rights is not a radical piece of legislation especially given the environment.

The 0% APR BT teaser promos made many good credit customers into subpar customers. Those who arbitraged those deals were rarer than hen's teeth.

Mark my words the credit scoring paradigm is going to shift big time before this recession plays out. The pendelum might swing as far back as the days when income proof was necessary and having credit was a privilege.

As for home ownership "The American Dream"....communities should become involved again with private charities like a Habitat for Humanity being the model. Obviously BIG Fed involvement ran amok....remember was the private sector charities that stepped up when all else failed.

We will survive this but not without a change in mindset.

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