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Is credit card regulation working?

by Peter Andrew

People disagree over government regulation of private enterprise. Across history, there are many examples of legislation that harmed both the organizations it meant to control but also the individuals it sought to protect. There are also plenty of examples where unrestrained capitalism damaged large numbers of people, indeed whole societies.

When the Credit CARD Act of 2009 made its way through Congress, credit card companies deployed lobbyists to resist some of the more radical proposals circulating on the Hill. They warned of dire consequences for the financial services industry and credit-card carrying Americans if the CARD Act passed.

Credit card regulation beneficial?

Now, two years later, it seems the legislation may have had few detrimental impacts. Indeed, it might even have worked in the interests of consumers, as it was intended to do. That's the view of the Center for Responsible Lending (CRL), which published a report Wednesday examining how CARD Act regulations affected credit card users.

Credit card companies embrace clarity

The CRL examined the spread between the credit card rates actually paid by customers and those advertised by card issuers. It found a wide gap emerged in the summer of 2004, which only narrowed around the time that CARD Act legislation, with its strict disclosure rules, was implemented.

The Center argues that, prior to the CARD Act, a lack of transparency over credit card rates stifled competition. Obfuscation prevented consumers from making informed choices. So why would credit card companies bother to compete on price when it was much cheaper to compete on the basis of who most effectively misled prospective customers?

Credit card use not more expensive?

The CRL goes on to make claims that many in the financial services sector are likely to dismiss. It says:

"Contrary to credit card industry claims, the new rules have not caused prices to increase or access to credit to fall. Instead, they have benefited the public by making credit card pricing significantly more transparent. Price transparency is likely to lower costs long term by spurring competition and making it harder for issuers to manipulate or arbitrarily raise prices."

Some of that thinking is counter-intuitive. Most of us know that our credit card rates have gone up, and millions have found their cards cancelled or credit limits lowered. However, the CRL uses hard data from the Federal Reserve and the big credit card companies to support its assertion that those changes are accounted for entirely by the credit crunch and downturn. It says that none is the result of regulation.

Whether or not the CRL's claims stand up to scrutiny, there seems little doubt that government regulation in general often brings with it unintended, sometimes damaging, consequences. Equally, it's hard to argue that totally unconstrained capitalism never has harmful effects. Perhaps, as is so often the case, some middle path is the way forward.

Published 02/18/11 (Modified 11/18/13)

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