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Unintended Consequences?

Back In May, President Obama signed a bill making it harder for credit card companies to remain profitable--by making it illegal for them to charge higher interest rates to demonstrably high-risk borrowers. At the time, the President had this to say (emphasis mine):

"We're not going to give people a free pass, and we expect consumers to live within their means and pay what they owe, but we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives[.]"
Credit companies, through their own volition, perform an important service. In exchange for interest payments, they allow people to spend money they don't yet have. This is a good thing. If we could only buy what we could pay cash for, we would naturally buy less. Buying less means companies that sell the things we buy would produce less of those things and therefor employ less people. This is a bad result.

Permitting responsible people to promise to pay money (plus interest) in the future that they're reasonably certain to acquire in exchange for the benefit of having an object or service today permits our economy to grow.

Credit companies (as with anyone) only lend money if the risks involved (non-repayment) are sufficiently mitigated by their receipt from borrowers of a promise to pay higher interest rates and late fees for failure to repay. This promise to be penalized is an incentive to the borrower to "act responsibly" and to "live within their means" and to "pay what they owe."

By removing credit companies' ability to charge appropriate interest rates and late fees to higher risk borrowers, Obama's removed the incentives for those borrowers to act responsibly and has actually achieved the opposite result by incentivizing bad behavior. If there is no penalty for spending more than you can afford to repay, then why not do so?

Credit companies have of course reacted by doing what I feel Obama always intended them to do. He's forced credit card companies to subsidize their losses by pulling the fees and late fees from responsible borrowers:

Starting next year, Bank of America will charge a small number of customers an annual fee, ranging from $29 to $99. The bank has characterized the fee as experimental. But card holders who have never carried a balance or paid late fees could be among those affected.

Citigroup, meanwhile, has started charging annual fees to card holders who don't put more than a specific amount on their cards, typically $2,400 a year. Other banks are charging inactivity fees if customers don't use their credit cards during a specific period of time.

And another layer of Obama's socialist agenda is revealed.

Whether it's the stimulus, cap-and-trade, health care or this credit card legislation, Obama's overarching objective is to redistribute America's wealth--from the hands of those who create it, to the hands of those who do not.

This is anti-growth and will prolong our economic downturn.


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Comments (23)

The credit card companies w... (Below threshold)

The credit card companies will not get any measurable revenues from this.

Any responsible borrower (by definition), when he sees such stupid fees, will take action to minimize the fees.

Ultimately, there will be no marginal revenues from these charges.

What will happen is, credit card companies will start dropping the high-risk borrowers.

Well I noticed in the last ... (Below threshold)

Well I noticed in the last month or so that Bank of America started charging me $2 to use a non-BoA ATM. They didn't do that before and it has me thinking of jumping ship.

Not that I wasn't close to jumping ship anyway, I just hate redoing my direct deposit and getting new checks.

I have a couple of Citi Mas... (Below threshold)

I have a couple of Citi Mastercards. If they charge me a fee, I'll just cancel them. Discover and Visa will work just fine for me.

I actually believe that the... (Below threshold)

I actually believe that the legislation was enacted to prevent the companies' dropping of high risk borrowers...much like the purpose of the CRA was to encourage (and then require) banks to deal with those least likely to pay.

And as I said in the post, the greater purpose is to drain the middle class even further by having them subsidize the high risk borrowers...and not to benefit credit card companies. They're only doing what they can to remain profitable. They're not going to take a loss on the high risk borrowers, they're going to pass the risk of dealing with them on to the rest of us....which was Obama's point, I think.

You don't object to CitiCor... (Below threshold)

You don't object to CitiCorpse charging customers an INACTIVITY fee to card holders who don't buy enough on credit?

Merrill Lynch did that to me once. Once. I moved my account and all of my business to Schwab the same day. I vote with my feet.

Charging customers a fee for not living on the edge of their credit limit is not only stupid and insulting to CitiCorp's customers but it's one of the reasons our economy is in the toilet in the first place.

I remember seeing a CNBC special on the credit card industry last winter, including interviews with industry consultants who have made a business out of deceiving customers into spending more than they can afford. Practices such as flooding the mail with credit card offers, mouse print contracts, cash transfer offers, cash advance checks, the abuse of "default" interest rates to jack up interest rates based on completely unrelated creditors, no-notice retroactive interest rate jumps, home equity "lines of credit" and a litany of other scams make it impossible to generate any sympathy at all for the piss-ant grocery clerks that run the credit card industry and their friends in Washington. This isn't about fairness. It's about money, and lots of it.

Yes, our economy runs on credit cards, but the show is being run by people who care only about making money, and credit cards are one of the most profitable part of the banking industry.

You want some credit at 30% interest? How much do you want? Call me.

BofA raised mine and my wif... (Below threshold)

BofA raised mine and my wife's interest rate to 10% from 4.5%. The reason of course is to pay for the irresponsible card holders that cannot be penalized. ww

The imposition of an annual... (Below threshold)

The imposition of an annual fee on a previously "free" card would cause that company to go the way of the dodo with me.
Of course, if they lose enough customers, Obama can always nationalize them!

Will: If you cancel your cr... (Below threshold)

Will: If you cancel your credit card, it will be recorded as a negative in your credit rating, since your "available credit" will drop. Got that? You get penalized for cancelling a credit card.

It's sometimes better to simply pay it off and leave it unused, unless you have to pay a stupid annual fee like Banco Medica charges or get whacked for an "Inactivity" fee from a sleazy card issuer like Citicorp.

Otherwise, just let it go to sleep and never wake up.

bobdog is right about the d... (Below threshold)

bobdog is right about the ding on your credit report should you choose to cancel a credit card. It would be better to open up another card without an annual fee first and then cancel whatever card is stupid enough to think that responsible individuals would pay an inactivity fee or a fee for paying off your balance every month.

bobdog and JR are correct.<... (Below threshold)

bobdog and JR are correct.

I carry about a half-dozen cards from various issuers, all with no annual fee. (I don't care about the interest rate because I never carry any balance.)

This enables me to not tolerate any stupid pet tricks that the issuers may try.

Hmm, good point about the c... (Below threshold)

Hmm, good point about the credit rating, but is there a limit to that? I have a lot of open credit. Would it still be a problem to cancel a couple?

If I understand it right, W... (Below threshold)

If I understand it right, Will, I think it would lower your credit score. Interestingly, it's conceivable that if you cancel a number of them at once, it might dump your credit score to such an extent that it might trigger your remaining card issuers to throw you into the "default interest rate" cesspool.

It's a twisted world, friend.

I use credit cards as a con... (Below threshold)

I use credit cards as a convenience. I rarely carry a balance forward. I did have a Sears card until several years ago. The payment arrived one day late (Christmas season). They assessed me a $35 late fee plus interest on the unpaid balance, even though there was a zero balance with that 'late' payment. I called and complained, they canceled the fees. I then sent them their credit card cut into pieces, closed my account, and expressed hope that the executive who thought up the 'late' fee had been given a large bonus.

Far as I'm concerned, you can charge interest on an unpaid balance, or you can charge a late fee for missing a minimum payment, but not both. There used to be usury laws in this country, evidently they no longer apply.

Barry can take his 'social justice' and cram it where the sun doesn't shine. One of the major problems that caused our economy to take was the liberal extension of credit to those who were getting in way over their heads.

I think credit card compani... (Below threshold)
Mac Lorry:

I think credit card companies have gone too far and do need tighter regulations. In the world of the internet and identity theft, paying with plastic in not only more convenient, it's safer. By federal law the card holder's liability is limited to $50 if their credit card is used fraudulently. That's not true of debit cards.

Any company that attempts to charge me an annual fee or non-use fees will get their card back. I'll take the hit on my credit score. That said, there are organizations you can join that offer credit cards, such as AAA. It's unlikely they are going to charge their own member such fees as they risk more than just losing a credit card customer. Rather than paying an annual fee ranging from $29 to $99, join AAA and apply for their credit card. Yes, you'll still pay $75 or more, but you get something for that money beside a credit card.

I don't think the these cha... (Below threshold)

I don't think the these changes were made to soak the middle class or implement a socialist agenda. It's just another case of those on the left legislating with their hearts rather than their heads. They feel bad for people who get in credit card trouble and want to do something to help the poor dears. The fact that their changes will have negative consequences for the rest of the economy either never occurs to them or is dismissed as an acceptable side effect because we have to help people.

You know You've hit home wh... (Below threshold)

You know You've hit home when the Trolls neg ya without even a scat nary posting!!

ha ha, Screw You trollschemer's or "grandmas spelunkers", if you will.

Mac, you're right about deb... (Below threshold)

Mac, you're right about debit cards. I won't have one, primarily for the reason you mentioned. If somebody picks off your debit card information, the liability is yours until you detect it and notify your bank.

Affinity credit cards vary. Groups like AARP, AAA, NAMBLA, NRA and such are simply hooking business for a regular credit card issuer in the background. Retail store affinity cards work the same way, some with favorable terms, and some are simply horrible.

Case in point, years ago I got an Eddie Bauer credit card because they offered a nice sign-up bonus. Months later, I bought a $57.00 sweater, decided I didn't like it, and returned it about a month later, which was credited to my card. Eddie Bauer laid the charge off on Spiegel, who laid the charge off to a little bank in Oregon.

By the time the credit got to Oregon, more than 21 days had elapsed, which generated a late fee and interest. I sent my payment stub in with a letter explaining that they should refer to the credit on my card and reverse their fees. In a fit of compassionate understanding, they charged me another late fee on top of the previous one, plus interest. By the time it was over, late fees and interest totalled over $120.00 on net purchases of zero.

We had words after the customer service representative at the bank suggested "Maybe you're the sort that shouldn't HAVE credit cards." They refused to close my account until I wrote them a letter and returned the credit card, which I had to fish out of my garbage, and the interest continued to run.

I took the hit on my credit report. I visit my credit report once or twice a year for nostalgia reasons, and it's still there. The ding in my credit report outlasted the bank, now out of business, Spiegel, now out of business, and Eddie Bauer, now in receivership.

There are 18 million stories in the Naked City. A lot of them are similar to this one.

bobdog,I don't kno... (Below threshold)
Mac Lorry:


I don't know the details of your case, but the AAA card is a Visa card. Same for many other branded cards. If it says Visa on it then the merchant and any bank involved have signed a contract with Visa and are bound to it by law. One of the terms is that you can appeal to Visa itself for resolution of any charge you think is invalid and their decision is binding on all involved parties. Thing is, you still have to make payments on any outstanding balance until the issue is resolved.

Years ago I ordered a new camera on-line, but then two days later I found it for over $100 cheaper in a local store. I called up the merchant and canceled the order, but a day later they shipped it anyway. I called up FedEx and had the package intercepted and returned to the merchant, but the merchant still wanted to charge me shipping fees. I disputed that charge with Visa and they agreed with me that the merchant had not acted in good faith in shipping an order that had been canceled more than a day before. Eventually I got credit for the shipping charge, which the merchant had added to my account.

Mac, you're right about mos... (Below threshold)

Mac, you're right about most affinity cards, but my Eddie Bauer card only mentioned Spiegel in its fine print, and Visa wasn't involved. You don't see this kind of card much any more, I don't think.

Disputes like the ones we had happen to a lot of people, and they are usually worked out equitably to everybody concerned. Most people, and most credit card customer support people are reasonable folks. I go out of my way to be nice whenever I can.

The Great Eddie Bauer Caper was an exception, and it was memorable only because of the hamfisted way an idiot bank employee chose to handle it.

In your example, imagine being charged a late fee and interest by the vendor because the credit didn't make their billing cutoff, and then being whacked again while you worked out the dispute. I didn't mention it above, but I paid the first late fee without complaint. In my case, the bank was acting as a holder in due course, and they weren't at all nice about it. It was a stupid way to behave, and it was a choice they made.

We don't forget the people that treat us badly along the way. For my part, I haven't been back to an Eddie Bauer store since.

The assertion that this is ... (Below threshold)

The assertion that this is somehow Obama's fault is ridiculous. Credit card companies are always finding ways "within the law" to make as much money as possible. The shit credit card companies can pull is almost obscene. They've never liked people who pay their bills off every month - those types of people aren't nearly as profitable as people who carry a balance. Google "The secret life of credit cards" and watch the videos.

I think you're referencing ... (Below threshold)

I think you're referencing the CNBC credit card documentary by David Faber.

The entire show is available here:


Recommended viewing.

No, Faber's House of Cards ... (Below threshold)

No, Faber's House of Cards is about the economic flameout caused by the mortgage bubble. Still recommended viewing. It's an unbiased documentary and it explains a lot about what caused the shitstorm we're in now.

DSC is referring to a PBS Frontline special from about 2004 which I've also seen a couple of times. I found a link to a slideshow at PBS, but not the video. Don't have the time right now to find the video, but it's probably out there. Excellent stuff worth looking for.

BobDog,I haven't s... (Below threshold)


I haven't seen that CNBC special but I'll look for it. You're right, I was referencing the PBS Frontline special. I had the title slightly wrong. Here's the link to watch it:







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