"Rate hikes and late fee traps have to end. No more fine print, no more confusing terms and conditions" (http://tinyurl.com/dcvbqm), said President Obama last week when advocating another big-government solution — this time to evils committed by credit-card companies.
Credit cards are a demagogue's dream come true. What better way to win public affection than to rail against banks for their harsh terms? In the politicians' morality play, creditors are the villains and debtors their helpless victims.
A little context first: No one has a natural right to a credit card. Someone has to be willing to undertake the risk in issuing it. Banks issue cards in their quest for profits. Nothing wrong with that.
Think about what a credit card is. It's convenient access to unsecured loans, permitting consumers to buy things large and small — not to mention emergency services — without cash. Pay the bill promptly, and you enjoy a fantastic service for virtually nothing. If circumstances prevent you from paying the bill in full, you can set your own payment schedule, realizing there is a minimum payment and that you will be charged interest on the unpaid balance. No surprise there.
To appreciate credit cards, it is worth recalling that before they came along, people got personal loans from banks, finance companies, pawnshops and loan sharks. Such loans were less convenient, and repayment was less flexible. Some people bought things on layaway, which meant they didn't take the goods home until they were paid for. Loan sharks sometimes broke people's legs.
Credit cards didn't create consumer debt — they are merely a superior alternative to older methods.
As President Obama and other politicians demagogue this issue, keep two things in mind: Life would be more difficult without credit cards, and banks don't have to keep issuing them. Be careful what you ask for.
Politicians are too short-sighted and vote-hungry to say such things. They want a "credit card holders' bill of rights" (http://tinyurl.com/b5bpew) that would prohibit certain billing practices, like raising interest rates on existing balances.
The House could approve the "bill of rights" this week.
Understandably, these billing practices endear themselves to no one, but competition makes the worst of them far less common. And as for raising rates, revolving credit means that a balance is a fresh loan each month; as the terms state, the rate can change. If issuers can never raise rates on existing balances, even when economic conditions change, they will be likely to charge everyone a higher rate to make up for the risk.
Todd Zywicki, a professor at George Mason University Law School and an expert on consumer credit, points out that the credit-card industry is highly competitive (http://tinyurl.com/dzqffs). The web is full of sites that permit easy comparison shopping (http://www.cardhub.com/). Competition has driven banks to more precisely match consumer costs to individual risk. In earlier days, every cardholder paid higher interest rates than today and an annual fee (a way around usury laws). Now, annual fees are largely gone. Rates are lower. Late and over-the-limit fees are unpleasant, but they aren't charged until a cardholder's conduct triggers them. This is not to say credit-card companies never abuse customers, but as Zywicki notes, "[T]here are ample tools for courts and regulators to attack deceptive and fraudulent practices on a case-by-case basis."
Politicians assume we are ignorant about credit-card terms. However, Zywicki points to evidence that people who carry credit-card balances are aware of the interest rate they're paying, and "those who carry larger balances are even more likely to ... comparison shop."
The "bill of rights" seems designed to prevent people from getting themselves in over their heads. That motive is honorable, but government has never been very good at such protection. The law of unintended consequences cannot be repealed, and what government gives with one hand, it inadvertently takes away with the other. Increasing the banks' costs will make it harder for poorer people to get credit cards, and that will only push them into costlier forms of debt, like payday lenders.
I've never understood how the poor are helped by limiting their choices.
John Stossel is co-anchor of ABC News' "20/20" and the author of "Myth, Lies, and Downright Stupidity." To find out more about John Stossel and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.
COPYRIGHT 2009 BY JFS PRODUCTIONS, INC.
DISTRIBUTED BY CREATORS SYNDICATE, INC.
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2 Comments | Post Comment
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John...I am soooooooooo disappointed in your column on credit cards and policies of same. Ideally people should know and take responsibility for understanding the business of credit cards. Newspapers are written at a level of an 8th grader. By the time 18 year old students enter college, their credit card age/understanding is about at a Kindergarten level. Very few are able to handle a department store credit card...which are standard issues at American universities.
With the dilemma of varying IQs of persons in the world, the fact that banks prey on the ignorant and gullible and needy is well recognized. Oh yes. There are many exceptions. You must admit the majority of people using credit cards today haven't a clue as to what they are doing when they "charge."
I am NOT speaking of myself. I have one credit card, use it for convenience and pay it off each month. I am not lured into specials which offer me a discount for using a specific store's or bank's credit card. I am the exception.
Please...you are a fair man. Recognize banks have megawealth due to credit cards.
Courtenay Cross
Comment: #1
Posted by: Courtenay
Sat May 2, 2009 4:25 PM
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Before politicians got involved with HUD, Freddie, and Fannie, intimidating the banks to loan money to people who literally couldn't afford to make payments for a home, nor the credit cards being so freely offered by banks just by signing your name, folks had to prove they could afford the 'American Dream' before banks would even talk to you. Politicians then decided a 'First time Home Buyers' program, with nothing down and sellers could pay the closing costs because everyone was 'entitled to a home', regardless of whether they could pay or not, was more than a common disaster! Its' a Taxpayers' nightmare. These same politicians forgot to, once again, think about the consequences since Nafta and Cafta played a huge roll in the stabililty of Americans and their futures! President Obama has asked for ideas to tighten governments' belts! Taxpayers, the few that have jobs left, would like to bring several critical issues to the table that would be a beginning to paying off trillions of dollars, borrowed without Taxpayers' consent, and put America back on track by 2035, if put into place immediately! Government should start running like a business; that is, President, Vice-President, Secretary, Treasurer and a few good people that work, rather than sitting around occupying a seat and burning up dollars America doesn't have! Its' obvious, some of these greedy politicians have too much time on their hands and this is why the country has gotten in such dire need of change! Layoffs and job cuts have to be done! Its' time to cut politicians salaries and retirements to $12,000.00 yearly! Or better yet, take all politicians assets, pay off all the trillions they've borrowed and sell them a one-way ticket to the foreign countries they've sold America to! At no time have Taxpayers heard the words "we, the politicians that's driven America into bankruptcy, will cut our salaries and retirements!" What an insult to the small business owners, working and struggling to make ends meet while politicians continue towards the bankrupting of America! In the business world, salaries, benefits and jobs are being cut; therefore, its' time for cuts and layoffs in all phases of government, beginning with 'our public servants', that to date, have been servicing themselves and not for Americas' benefits! It doesn't take a rocket scientist to figure why politicians created Nafta and Cafta, taking Americans' jobs and stability, thus causing a huge breakdown in society! Without textile and furniture manufacturing jobs, how would anyone be able to afford housing, furniture, clothes, autos, or anything else. Therefore, instead of government bailouts, handouts, Freddie, Fannie, HUD, AIG, Banks, Automakers, or any company in bed with government and politicians, these 'endless money pit programs' should be cut completely out, as so many of these 'politically motivated useless departments' have never worked! It's real chaos for America! 1977 started the downhill trend of spending, by all politicians, for social and welfare programs, and it has now put America in jeopardy! All these programs, including non-profit organizations, should be stopped immediately! Beginning with the cutting of aforementioned critical issues, 'Fair Tax', to include property taxes, should follow, as everyone that wants to be a responsible and constructive American must pay their fair share of taxes, and stop making it the burden of the cash-straped homeowner thats' barely getting by, since government intervention! Until government and politicians change their 'tax and spend' bad habits, step up to the plate and take responsibility for the bad debts created by you, 'politicians are not solving the problem' - 'they are the problem!'
Comment: #2
Posted by: Shirley deLong
Sun May 3, 2009 11:45 AM
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