Saturday, May 16, 2009

Consumer Advocacy: Credit Cards

I've been thinking a lot lately about the need for regulation in the small-scale marketplace of consumer goods. As Gina and I have become more and more poor to pursue our dreams of higher education, it has become easier to see just how often companies cut ethical corners to make a few more bucks. The Hebrew Bible demands ethical dealings in the marketplace, especially prohibiting those practices that oppress the powerless members of society. I think this provides a great jumping off point for deciding which economic practices are ethical and which are not, as it points to the issues of exploitation, class division, and powerlessness. This column, which I'm calling "Consumer Advocacy," will take a closer look at one type of consumer good and examine ethics of common practices within that market.

Credit cards

Most have felt the sting of high interest rates from their credit cards. Credit cards are in need of reform, and a bill is going through Congress right now attempt to do just that. I am taking a look at not only the practices in need of reform, but the proposed Credit Cardholders' Bill of Rights Act of 2009. For a decent summary, click here or for the full text click here. Is it really the be-all, end-all of reform, or is it just the first step in the right direction?

First, credit card companies automatically apply your payment to the lowest-interest balance first. A credit card company will offer you 0% interest for a limited time. Let's say you have $1000 of 30% balance on a card, and you're trying to pay it down. Then you have a small financial crisis. You just got a 0% interest deal from your credit card company, so you buy $600 worth of goods at 0% interest. Each month, as you pay your payments, they will now be applied to the $600 balance while your $1000 balance continues to skyrocket. The consumer should have the choice to apply their balance as they see fit. The current bill in Congress sets up requirements for how the balances are to be paid off. These requirements are generally in the public's best interest, but the freedom of choice is still not in the consumer's hands, as the rules require the credit card companies to apply the payments.

Another issue with credit cards is the use of double-cycle billing. Double-cycle billing works by charging interest over the average balance of the most recent two billing cycles. So let's say you carried a $1000 balance throughout May, and you paid it off in full on the last day of May. In June, you added no new balance, so you carried a $0 balance for the month. With double-cycle billing, they'd average your last two balances--$1000 for May and $0 for June--in your June bill. Thus, they would charge you interest on $500, even though your principle is zero! The new bill in Congress makes this illegal.

The third--and possibly the most controversial--issue with credit cards is how high the interest rates are. Unfortunately, the new bill in Congress does not address this issue. Many attempts have been made to cap interest rate, but none have succeeded. Part of the problem is that no one can agree on a cap: proposals have ranged from a ridiculous 36% (which is hardly a cap at all) to very low caps that have no shot at passing Congress. The best answer is probably a cap expressed in "percentage over prime" language, but none have been proposed. I'd like to see something under 20%, because that's more than sufficient to keep someone in debt slavery. Something that would hover between 10 and 15%, depending on the market, would be a good compromise. Obviously, credit cards' interest rates can't be as low as a savings account, but they shouldn't be as high as they are.

Finally, too many credit card companies target young people in order to drag them into a lifetime of debt. The current bill in Congress does nothing to correct this. To prevent predatory lending practices, there should be a limit to the amount of credit extended to a first time card user, which is allowed to increase only if they have proven to be responsible (with "responsible" being clearly defined in some way). After five years, this limit could be lifted. This would protect not only young users, but first-time users of all ages.

Unfortunately, these gripes do not begin to describe the excesses of credit card companies. Thankfully, while the CCBOR does not address many of my concerns, they are addressing other ones, such as limiting the amount of rate increases are allowed, and limiting credit card companies to just three over-the-limit fees per instance of going over the limit. It also allows a cardholder to opt into a program where their card is rejected--without fee--when they try to purchase something that would put them over their limit. These are good decisions, and it's good to see Congress doing something to provide some laws to this otherwise rather lawless market. However, they have still only adequately addressed three of the four issues I find most pressing. I invite you to read the bill and/or offer criticism/comments below.

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