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The recent instances of credit card companies raising interest rates without apparent reason and then offering cardholders a tiny window within which to repay at the old rate are a perfect example of why disclosure is a flawed paradigm for consumer protection.
For more than 50 years, we have assumed if consumers were made aware of their loan terms (however onerous and convoluted), they could make informed decisions. Disclosure was a way of saying: Caveat emptor.
But disclosure alone is inadequate, especially in cases where responsible cardholders unexpectedly have their rates raised significantly—going, for example, from 11% to 24% annually. We erroneously assume consumers read, understand, and act on the explanation of credit card terms they receive. Many consumers, even those who read what they receive, do not fully understand the disclosures, which are often in small print or legalese. In addition, what drives consumer decision-making is not always rational choice: Mood, emotion, and fiscal reality influence choice. That is precisely why we have federally mandated cooling-off periods for door to door sales.
We must look beyond disclosure for consumer protection. If the subprime lending crisis teaches us anything, it is that disclosure is simply not enough. We need to look to increased regulation to protect consumers, most particularly those who are vulnerable.
The recently introduced Credit Cardholders’ Bill of Rights (H.R. 5244) provides a good starting point, but we can do more. Many consumers cannot navigate the consumer financial marketplace; they cannot substitute one card for another on short notice and repay outstanding balances in one fell swoop (even over several months).
What we need is clear prohibitions that curb certain credit card lending practices, such as unjustified significant rate increases. We also need to make sure there are strong remedies for breaches—including subjecting credit card companies to monetary penalties, loan cancellation, and private causes of action (including class actions), establishing greater protection of states’ rights.
Disclosure is but one facet of an approach that must include legislation with real teeth. Only then will the term “consumer protection” have real meaning.
The burdensome, patronizing, new credit card regulations proposed in the wildly misnamed “Credit Cardholders Bill of Rights” will hurt just about every type of U.S. consumer.
Indeed, the new restrictions that self-styled “consumer advocates” and their trial lawyer allies envision will result in immediate, sizeable interest rate and fee increases for the majority of Americans who pay their credit card bills on time. Quite simply, efforts to cap, reduce, and ban penalty fees and interest-rate hikes for bad customers will axiomatically lead profit-minded companies to seek returns elsewhere. Many will hike the annual fees and interest rates for everyone else. New ways to litigate likewise will create another lawyers’ payday while doing nothing to help ordinary Americans.
Those who live on limited incomes or fail to pay their bills on time—the supposed beneficiaries of the proposals—will also see themselves hurt. Many will be denied credit that bureaucrats decide they “can’t afford.” More will find they only qualify for the “secured credit cards”—which require a bank deposit against the credit line—that predominated in the dark days before deregulation helped banks figure out ways to extend credit to everyone.
In fact, the current credit card regulatory system serves consumers pretty well. Although hardly anybody reads through the dense fine-print agreements that come with credit cards, the mandatory easy-to-read disclosures of interest rates, penalties, and fees already give consumers a simple repository of information. The widespread availability of balance transfers—an option on nearly all non-merchant-branded consumer credit cards—helps consumers “repay outstanding balances in one fell swoop” and transfer money away from card issuers whose policies they don’t like.
Of course, the situation isn’t copacetic. Credit card agreements remain difficult to navigate, and many consumers find card issuers unfriendly. A drastic simplification of current regulations could eliminate a lot of the difficult fine print. Decreased regulation of credit card issuers, likewise, could let them find more creative ways to serve consumers’ needs. In short, we need less regulation, not more.Opinions and conclusions expressed in the BusinessWeek.com Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.
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