No credit is worse than costly credit. That’s a lesson American consumers will learn soon when Congress regulates credit cards.
The House of Representatives recently passed a bill to set a ceiling on credit-card interest rates. The Senate’s Banking Committee reached agreement on a similar measure this past week. Sen. Chris Dodd, the Connecticut Democrat who got below-market mortgage rates from Countrywide, promises “strict new rules.” The Senate is likely to vote this week.
While tapped out credit-card holders might welcome some relief, we invite them as well as their senators to think about the long-term effects of price controls. If barred from charging high interest rates, prudent credit-card issuers will try to cut their losses by denying credit to high-risk groups. The result? Fewer people will have access to consumer credit. As for the rest of us, expect credit card companies to boost interest rates up to the legal maximum.
Don’t blame greed. The credit-card issuers won’t have a choice. They too have investors looking for a fair return. Planning to lose money is not a good career move for any executive.
The Senate Banking Committee compromise last week blocks companies from changing terms - such as interest rates - unless that card has been delinquent for at least 60 days. By then the harm may already be done. Higher interest rates or lower credit limits could keep cardholders from getting into trouble to begin with.
Price controls could not come at a worse time for the credit-card industry. Oliver Wyman, a management consulting firm, estimates that credit-card losses at the nation’s biggest banks could total more than $142 billion by 2010. Proposed regulations will make an industry already reeling from the economy bear even larger losses and dry up the willingness to lend.
President Obama already has damaged credit markets. His campaign promises to let judges rewrite mortgage contracts to reduce interest rates and even shrink the amount of principal owed likely spooked many lenders from making loans this last year, further driving down home sales. The Chrysler bankruptcy, in which the government overcame the protections that secured lenders have to get paid off first, makes lending to companies even riskier.
The best option is for Congress to do nothing. Credit-card firms know how to maximize the number of credit-card holders while minimizing the risks of default. This balance is achieved through the fees and interest rates charged. If Congress puts its thumb on the scale, every one could be made poorer.