Why the new credit card law stinks

Call it a crime of omission. Columnist Michelle Singletary writes in the May 24 Washington Post that credit card holders who have been paying off their balances every month and not paying interest or fees are basically freeloaders who have increased borrowing costs of the less wealthy. She argues the new credit card law, which will likely result in all card holders paying fees, is their just deserts.

Singletary has a point—all credit card holders should probably pay some sort of fee for the service, and that the poor have been burdened, often unfairly, by the freewheeling credit culture of the past couple decades. But this law is the wrong way to correct past injustices. Rather than taking on the perpetrators at the heart of the credit card debacle, it penalizes responsible consumers who have long avoided the scam and whose only crime (almost a felony it seems these days) is to not spend too much.

Consider what the new law does to individuals who have paid their bills regularly and have accepted the regular increases to their credit line the card companies have arbitrarily imposed. Now, (if predictions hold) they will either pay the annual fees on the 4 or 5 cards most of us own, or have their FICO score significantly downgraded if they choose to eliminate credit cards they don’t care to keep and pay for. They can either subsidize the gougers and those who have slipped into their trap, or accept the higher costs associated with a downgraded credit score. Correct me if I’m wrong, but it sounds like the new law is supporting excessive spenders and their enablers, not the people who might prevent this country from going bankrupt.

What the system needs is a law that rewards fiscal responsibility, provides choices to borrowers, and encourages restraint. I freely admit that no one will support such a bill because it would probably drive most credit card companies out of business.  But let’s outline it anyway.

First of all, when a person applies for their first credit card (usually the young and the foolish), you don’t give them $5000 or $10,000 credit, you give them $100. OK, $500 but that’s just because I’m feeling generous. If they know how to manage that—give them two years to prove it—then start upping the limit, slowly, with increases contingent on their ability to manage their new credit lines. Credit up to $5000 should be provided without a fee unless there is an awards program attached to it. Over $5000, fees should be built on a sliding scale to discourage building up excessive credit. Any increases in credit should be requested by the card holder, not arbitrarily imposed by the credit card company. Finally, FICO score calculations should be reconfigured to allow current card holder to cancel credit cards they don’t wish to pay for, and to weigh credit to debt ratios less heavily, at least with regard to credit card debt.

Regarding interest rates, I don’t want to strike a dagger in the heart of pure Darwinian capitalism but if my car company can make money loaning me money at 4 percent, I think any credit card company can make money charging between 10 and 15 percent, or a regulated difference that factors the company’s cost of borrowing. If a company feels compelled to charge 30 or 40 percent interest on its credit, maybe civil society is not for them. There are plenty of waste management companies not far from the Hudson looking for investors.



 

Posted by patrickj on 05/26 at 01:05 PM
PoliticsPermalink

 

great post
Thanks for writing about it.
Loved it!

Posted by hoda  on  07/11  at  03:19 AM

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