Will Credit-Card Legislation Cut Off Consumers?

The Senate is likely to pass its credit-card legislation on Tuesday, imposing new restrictions on a long list of industry practices around fees, disclosures and interest-rate changes.

The credit-card industry has warned lawmakers that the bill could cut access to credit for millions of Americans.  How realistic is the industry’s argument?

The bill certainly could cripple some issuers that rushed in recent years to extend credit cards to people with poor credit quality. With high interest rates and strict penalties, some companies survive on customers who don’t have much of a shot at paying their balances in full every month.  The broader industry is likely to see its profitability shrink with government-imposed limits on raising interest rates even for future balances. (Among the Senate provisions: If a customer’s rate is raised due to paying bills late, the company must restore the prior, lower rate if the customer pays on time for six straight months.)

The government’s answer to the industry’s warning: That’s fine. Senate lawmakers have lined up to say some consumers shouldn’t be getting credit if it comes at costs that are so high the holder is unlikely to ever pay it off.

In an interview today, White House economic adviser Austan Goolsbee essentially said it’s fine if card companies’ profits are crimped a bit. “There’s nothing that says the credit-card companies need to maintain exactly the same profit rates that they have when there aren’t rules of the road,” he said.  Raising interest rates after the fact on existing balances, for instance, is “not a valid business practice,” he said.

“We’ve gotten into situations where some of the most egregious actors have pushed us to the point where it’s like, ‘Well if you didn’t want to be mugged, you shouldn’t have been walking out in the park because everyone knows there’s muggers out here,’” Mr. Goolsbee said. “We’ve got to get away from that to a business model where they make money making loans but everything’s in plain language, people can understand it and they don’t engage in trick behavior.”(…)



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