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CARD Act a win-win for credit card companies and customers

by Peter Andrew

Credit card companies love rules and laws. Try breaking the terms you signed up for in your card agreement, and see how long it takes them to get you into court - or, more likely, up in front of an arbitrator whose decision is legally binding.

Credit card interest rates not capped

But those same companies aren't so keen on rules and laws that place restrictions on them. When the Credit CARD Act of 2009 was making its way through Congress, lobbyists were successful in pulling many of the new law's sharpest teeth.

Whatever happened to the proposed 36-percent APR cap on credit card interest rates? And how come credit card companies were given such a long grace period before the Act was implemented, allowing them to increase rates for millions of cardholders?

Possibly, these dilutions are down to the strength of the money lobby. According to the Consumer Education Foundation, financial institutions made political contributions worth $1.7 billion, and spent another $3.4 billion on other lobbying efforts, during the decade between 1998 and 2008. How much does that buy you on Capitol Hill? Well, last year, The Herald-Tribune quoted Senator Dick Durbin, D-Ill., as saying that the banking industry "frankly owns the place."

Credit card companies mistaken?

But are credit card companies throwing their money (which is really your money) away on all this lobbying? The CARD Act was finally and fully implemented on Aug. 22, 2010, and, hardly a year later, most card issuers are posting exceptionally healthy profits. So much for all those lobbyists' predictions of the demise of the industry, which, supposedly, would inevitably result from regulation.

And people like their credit card companies more. At the beginning of November, ConsumerReports.org found:

New federal rules barring many abusive practices by credit-card issuers seem to be having an effect: Only 12 percent of Americans said their credit-card companies had generally treated them unfairly, according to Consumer Reports' nationwide survey, down from 15 percent in 2010, and 22 percent in 2009.

Now it may well be that many purveyors of plastic couldn't give a damn what their customers think of them. But, if they're making mountains of money and are more popular, then what's their problem?

Credit card regulation can benefit everyone

It's not just the 2009 law that affects what a credit card offers a consumer. Earlier legislation caps the liability of customers in the event of fraud, and provides many of the purchase protections that people find so valuable. Both those make the statutory rights that come with credit card use stronger than those enjoyed by people using debit cards, prepaid cards, checks or cash.

And it's quite possible that they've actually made credit card use more popular, more widespread, and more profitable for card issuers.

Of course, some credit card companies choose to offer even greater protections than they have to. ConsumerAffairs.com explored some of these. American Express, for example, doubles a manufacturer's warranty period for up to an additional year on eligible purchases made using its cards. So if your dishwasher came with a 12-month warranty, and blows up on the 366th day (or the 729th), you're covered.

(Check your American Express agreement for terms and conditions. If you don't have an American Express credit card, check your other card agreements. Visa and MasterCard have similar programs for some of their cards.)

Credit card debt and failed regulation

By now, roughly half this article's readers are likely to be purring with delight at this advocacy of government regulation, while the other half (assuming they haven't already thrown their monitors through their windows in rage) are probably close to apoplexy. And that latter group has some good points. All too often, government interference in marketplaces results in unintended consequences.

One of these emerged in November, and concerned the Credit CARD Act. A Boston College research study found that one of the law's provisions had precisely the opposite effect of the one intended. The legislation sought to encourage consumers to pay down their credit card debt quickly by forcing issuers to include on monthly statements the potential costs in interest payments of the balance, along with illustrative examples showing the impact of alternative repayment time lines.

The idea was that, armed with that knowledge, consumers would choose to minimize their outgoings by reducing their debt as quickly as possible. The reality? Surprisingly, the Boston College study found that "disclosing future interest costs significantly increased the likelihood a cardholder would pay only the minimum required." Once again, perversely, regulation benefits credit card companies.

A personal point of view

This writer's view? Well, there was a time when was life was more simple, and there was little valid reason for governments ever to interfere in commerce. For example, when your ancestors went to the general store to buy sugar, it was kept in a big sack, and they inspected it and even tasted it before the clerk weighed it and put it in a paper bag. But once sugar came prepackaged, it was necessary to have consumer protection laws (and later the FDA) to ensure that it was as described, safe and of reasonable quality.

It's a bit like that with credit cards. Today, life is too complicated to rely wholly on 18th-century principles. And despite improvements in disclosures stemming from the Credit CARD Act, a typical credit card agreement is still pretty inscrutable. And let's face it, how many of those who have the skills to understand credit card contracts have the time or the inclination actually to read them?

This isn't an attack on free enterprise; just the opposite. But, in order to work efficiently, markets require transparency so that both parties to a contract have a full understanding of their obligations and rights. Until that happy situation arises, governments are likely to have a highly limited role in leveling the playing field.

Published 11/10/11 (Modified 05/12/14)


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