Newspaper article The Christian Science Monitor

New Credit Card Rules: A Punishment for Responsible Borrowers

Newspaper article The Christian Science Monitor

New Credit Card Rules: A Punishment for Responsible Borrowers

Article excerpt

The Credit CARD Act will mean higher fees, higher interest rates, and lower bonus points.

President Obama called it a landmark consumer protection measure that will put an end to credit card companies' "deceptive, unfair tactics that hit responsible consumers with unreasonable costs." The truth is, unfortunately, the opposite: The Credit Card Accountability Responsibility and Disclosure Act (CARD) rules that took effect this week will harm responsible consumers.

Once again, the law of unintended consequences will trump good intentions.

By limiting the lenders' ability to charge higher interest rates and fees to riskier borrowers, the law will result in lenders treating borrowers with poor credit ratings and a history of late payments almost the same as borrowers with solid credit ratings who pay off their credit card charges on time. This will, in effect, penalize responsible consumers.

While the law limits a credit-card issuer's ability to raise interest rates after a consumer becomes a customer, it does nothing to prevent lenders from charging high interest rates up front.

There is a reason why credit cards carry high interest rates. Credit cards provide loans that are convenient for borrowers and risky for lenders. Borrowers can get loans up to their credit limit on the spot, no questions asked, and can repay these loans using minimum payments over a long period of time. No other financial product allows people such easy credit access.

On top of this, these loans are unsecured. Should a borrower default, the lender cannot seize any property for repayment. And credit-card balances can be completely discharged in bankruptcy.

Even with credit reports, credit-card companies cannot distinguish bad borrowers from good ones with a sufficient degree of certainty before credit is granted. This was not a major problem for lenders when they could swiftly raise a cardholder's interest rate after finding the borrower to be a higher risk (when he or she makes a late payment, for example).

The Credit CARD Act, however, outlaws this "try and see" approach, but does nothing to change the risk associated with credit- card loans. It only limits the ability of credit-card companies to collect revenue from risky borrowers to compensate for the risks they represent. …

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