Will Credit Cardholders Bill of Rights Act be Effective?
The United States Senate is set to deliberate the Credit Card Accountability Responsibility and Disclosure Act of 2009 (S 414) this week. On 27 April 2009, the United States House of Representatives passed a similar bill by a vote of 357-70. President Barack Obama has voiced his support for the measures in Congress, applauding the legislation for its focus on abusive credit practices including retroactive rate increases and limits on universal default.
With unemployment now at 8.9% and expected to hit around 10% by next year, both the Administration and the Congress see now an opportunity to address perceived abuses hoping that given the Democratic control of both houses and the White House, this will be the moment to provide Americans with some relief.
Both bills prohibit retroactive increases of interest rates on unpaid balances. In addition, credit card issuers would be required to give 45-day notice to cardholders of any increases in rates. Double cycle billing would also be prohibited and the bills limit interest rate increases that are related to consumer behavior. For example, if you receive a loan from another financial institution and you appear overextended. The bill also limits assessing over-the-limit fees.
The American Bankers Association has taken the position that credit cards are essential to the cardholder especially during an economic downturn. Credit cards provide ways for individuals and businesses to bridge short-term financial gaps. In addition, credit card use supports the consumption necessary for driving the economy. According to the ABA, given that the Federal Reserve already has consumer protection regulations in place, any additional legislation should balance consumer protection with maintaining access to credit.
This bill, while providing additional consumer relief in the short run, as well as political cover for the Administration and the Congress, may have a longer term negative impact on the consumer. Card issuers will have to take action to recover lost revenues resulting from the elimination or reduction of fees.
More importantly, given that there are consumer protection rules already in place, Congress and the Administration have not provided any economic reasons for intervening in the market. Demand for and supply of credit cards exists. According to the Federal Deposit and Insurance Corporation, the average American household carries credit card balances between $7500 to $8000. Over 115 million Americans carry monthly credit card debt. The “abusive” behavior cited by the Administration and Congress has less to do with credit card company abuse than with the nature of credit card accounts, which represent unsecured debt.
Credit card issuers will be forced to reduce, discontinue, or deny credit to certain consumers and thus exacerbate the problem of decreasing consumer demand for goods and services. Rates are increased in order to alleviate risks from nonpayment and given the state of the economy, rates need to be increased, not eliminated. In the short run consumers may not be subjected to perceived abusive behavior of having to pay a few extra dollars for a late payment but in the longer run will be subject to an even greater inconvenience when they are unable to access goods and services.