Thursday, August 26, 2010

What has your government done for you lately?

Posted by Lilac Sunday; from Lilac Sunday: Red Girl in a Blue State


Answer: They've made the interest rates on your credit cards go up.

Up until recently, banks could tailor the cost of credit to the risk of default by raising or lowering interest rates on customers based on the customers' credit-worthiness and financial condition, and assessing steep penalties on customers who breach their agreements by paying late or not paying at all. And why shouldn't they be able to? Credit cards are collateral-free lines of credit, tremendously valuable to the customer and potentially very risky to the bank; in order to ease access to credit on the front end, and allow people to obtain cards without the time commitment and document production required for other loan products such as, say, mortgages, banks made the entry barriers low and then slammed you when you broke the agreement. And that's the way it should be. The greatest possible number of customers benefit from easy access to credit, and the greatest possible share of the systemic costs of customer default are borne by the defaulting customers themselves.

At least that's the way it used to work. Last year, in response to scattered customer complaints and a general desire to impose communitarian versions of "fairness" on the financial sector, Congress passed the Credit Card Accountability Responsibility and Disclosure Act (Card Act), which reduces banks' ability to accurately price risk and penalize default. As a result, banks have less flexibility to raise interest rates on customers once they've opened a credit card account, and less ability to impose meaningful penalties on customers who default.

What happens when banks can't recover the cost of default from the defaulting customers? Bingo, they recover the cost from all customers, including those who use credit wisely and comply with the terms of their agreements. Banks started raising their credit card interest rates before the Card Act's interest rate provisions took effect in February, they've been quicker to reduce credit lines, and access to credit is becoming more difficult. Card Act provisions limiting the imposition of penalties took effect this past Sunday, so the tightening of consumer credit is only going to accelerate.

The Card Act's sponsor, Carolyn Maloney (D-NY), remarked: "Better that consumers should know up-front what the interest rate is, even if it is higher, than to be soaked on the back end by tricks and hidden fees." In other words, let's spread the wealth around; people who read agreements before entering into them, and who keep their financial bargains, are going to bear the financial burdens of people who default. Because in the Left's twisted version of fairness, making everyone suffer equally is only fair.

I've never been "soaked on the back end by tricks and hidden fees" by a credit card company; I'm not lucky, I read and save the disclosures. But thanks to Carolyn Maloney, American financial illiteracy has been codified by an act of Congress, which has eliminated what used to be a very strong motivation to understand and remember the terms of any financial agreement we freely enter into.

8 comments:

RightKlik said...

Fantastic post... Thank you!

Chicago Ray said...

""What has your government done for you lately?""

Jack shiite.

Lilac Sunday said...

Thank you for adding the pic, and for correcting my typos!

John Carey said...

Great posts that is spot-on. Every time the government steps in to employ some type of regulation that ensures fairness and economic justice we end up paying the price. And the price keeps going up.

Trestin said...

Well done.

This is what happens when people that hate capitalism are in charge of the system.

Matt said...

What have we seen so far this week? We've seen more people losing their health insurance, more people losing jobs, the price of used cars going up,and now the credit card interest hike. Yessir! This is the "change" that we've been waiting for!

brandon said...

Hmm, my credit card is still 6.99%...is that still Obama's fault? Moreover, do you think that credit should still be easily accessible to the American people seeing as they could not pay it back and caused this mess with UNREGULATED subprime mortgages? Did the private sector give to poops that they were selling a 300K house to a family with the joint income of 65K? The private sector is like water in a creek. It will find the easiest most efficient way around the rocks, but sometimes the best thing for society is the harder route.

brandon said...

@Matt, my credit card rates have gone down, and last I remember people were losing their jobs BECAUSE WE ARE IN A RECESSION THAT occurred before Obama...hilarious the short term memory...