Credit card reform doesn't go far enough
The Obama administration has been talking a lot these past couple of weeks about credit card reform. I'm glad they're doing it, because frankly, credit card companies have been allowed to get away with far too much for far too long.
However, the reform bill, H.R.627, doesn't go far enough.
The basic structure of the bill is to amend the existing Truth in Lending Act to add some additional rules and empower an oversight board to actually determine how those rules should be implemented. The main new rules include:
There's a bunch of other little things in there too, but those are the big changes. In all of these new rules, no specific numbers are given. These are left to that oversight board to determine. The bill gives the board 9 months to figure out the specifics (e.g. what "reasonable and proportional" penalties really means).
I'm sorry to say that I don't see this as much of a reform. Call me cynical, but I'm not going to hold my breath that the board is going to come out, nine months from now, with a set of specific numbers on each of these rules that is going to actually make much difference in the day-to-day experience of credit card use for the vast majority of Americans. It just feels like there's too much wiggle-room, and too much opportunity for the credit card companies to influence the decision makers on this board to come out with a really watered-down implementation of the rules set forth in H.R.627.
And that, really, is what it comes down to: the day-to-day experience of using credit cards.
I think that daily experience, combined with the lack of transparency about how much you're really paying for your credit card, is really where the root of the problem lies.
Ultimately, using a credit card is a trade of money for convenience. When you use your credit card, you're agreeing that you prefer the convenience of not having to use cash or not having to write a check enough that you're willing to pay--let's pick a hypothetical credit card rate--15% percent more for everything you buy.
That adds up. And it's not at all obvious at the point of purchase that this is the case. You sign the credit card slip for whatever amount you owe the store, but when all is said and done and you've paid your credit card bill, you will have sent 15% more money to the credit card company than the sum of all your purchases.
It's just not obvious that this is the case.
To me, real credit card reform would make it obvious to consumers what they are really paying for what they buy. Let's say you go to Target, and load up your cart with everything from new socks to toothpaste. Your total at the cash register (Heh. "Cash". How quaint.) comes to a nice round $100.00. Real credit card reform would mean that when the cashier hands you the slip to sign, instead of it showing a total of $100, it would show you the total, plus the $15 surcharge that you're going to eventually pay to the credit card company for the convenience of not conducting that transaction by cash or check. Before you sign, you would have the opportunity to say "hey, wait a minute. This isn't that convenient!" and whip out your checkbook instead.
This would not be difficult to implement, either. Your credit card already gets authorized (or rejected) at the time of the purchase, which means that the merchant's credit card terminal contacts the credit card company to see if the card is good for the amount of the purchase. When the credit card company's computers send back that "authorized" code, it could just as easily also send with it a surcharge-amount calculated according to your card's actual terms and interest rate.
That would be real credit card reform.
The problem of credit cards is the difference between the easy, carefree experience of using them, and the actual cost they hit you with on the back end. In behavioral terms, the pain credit card inflict on you is so removed from the behavior that causes that pain, that you lose the opportunity to learn from your mistake. To fix this problem, any meaningful credit card reform needs to address this disconnect.
In H.R.627, I don't see that happening.
However, the reform bill, H.R.627, doesn't go far enough.
The basic structure of the bill is to amend the existing Truth in Lending Act to add some additional rules and empower an oversight board to actually determine how those rules should be implemented. The main new rules include:
- Limiting how and when credit card companies can raise your rates.
- Mandating that if they use factors like your payment history or credit rating to determine that they need to raise your rates, they must also periodically re-evaluate your account and lower your rates if you have improved on those same factors.
- Limiting late fees and other "oops" charges to be "reasonable and proportional" to the error.
- Restricting rate and fee increases to apply only to future balances, not existing balances.
There's a bunch of other little things in there too, but those are the big changes. In all of these new rules, no specific numbers are given. These are left to that oversight board to determine. The bill gives the board 9 months to figure out the specifics (e.g. what "reasonable and proportional" penalties really means).
I'm sorry to say that I don't see this as much of a reform. Call me cynical, but I'm not going to hold my breath that the board is going to come out, nine months from now, with a set of specific numbers on each of these rules that is going to actually make much difference in the day-to-day experience of credit card use for the vast majority of Americans. It just feels like there's too much wiggle-room, and too much opportunity for the credit card companies to influence the decision makers on this board to come out with a really watered-down implementation of the rules set forth in H.R.627.
And that, really, is what it comes down to: the day-to-day experience of using credit cards.
I think that daily experience, combined with the lack of transparency about how much you're really paying for your credit card, is really where the root of the problem lies.
Ultimately, using a credit card is a trade of money for convenience. When you use your credit card, you're agreeing that you prefer the convenience of not having to use cash or not having to write a check enough that you're willing to pay--let's pick a hypothetical credit card rate--15% percent more for everything you buy.
That adds up. And it's not at all obvious at the point of purchase that this is the case. You sign the credit card slip for whatever amount you owe the store, but when all is said and done and you've paid your credit card bill, you will have sent 15% more money to the credit card company than the sum of all your purchases.
It's just not obvious that this is the case.
To me, real credit card reform would make it obvious to consumers what they are really paying for what they buy. Let's say you go to Target, and load up your cart with everything from new socks to toothpaste. Your total at the cash register (Heh. "Cash". How quaint.) comes to a nice round $100.00. Real credit card reform would mean that when the cashier hands you the slip to sign, instead of it showing a total of $100, it would show you the total, plus the $15 surcharge that you're going to eventually pay to the credit card company for the convenience of not conducting that transaction by cash or check. Before you sign, you would have the opportunity to say "hey, wait a minute. This isn't that convenient!" and whip out your checkbook instead.
This would not be difficult to implement, either. Your credit card already gets authorized (or rejected) at the time of the purchase, which means that the merchant's credit card terminal contacts the credit card company to see if the card is good for the amount of the purchase. When the credit card company's computers send back that "authorized" code, it could just as easily also send with it a surcharge-amount calculated according to your card's actual terms and interest rate.
That would be real credit card reform.
The problem of credit cards is the difference between the easy, carefree experience of using them, and the actual cost they hit you with on the back end. In behavioral terms, the pain credit card inflict on you is so removed from the behavior that causes that pain, that you lose the opportunity to learn from your mistake. To fix this problem, any meaningful credit card reform needs to address this disconnect.
In H.R.627, I don't see that happening.
# Posted by Jason Black : 10:34 AM
Comments:
Ummm, the only certain charge when you use a credit card is the 1 to 5% the merchant is not reimbursed. E.g., you pay Visa $100 at the end of the month, and the merchant only gets $98 from Visa a few weeks after that.
If you buy something, *and don't pay for it for a year*, then you pay 15% (or more) in interest.
In 20+ years of using a credit card, I have only once not paid the balance in full. I let it slip one month, because the ~1% interest was worth it making the purchase a month earlier than I could afford with cash.
Your lack of understanding about how credit works - the use of someone else's money to get something you want today but cannot afford - is amazing.
That said, the reforms passed today are on the right track; consumers don't understand what "revolving" credit and variable interest rates mean, so government regulation to limit it makes sense.
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