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Credit Card Regulation: The Good and The Bad

by admin on May 29, 2009

credit card customer Credit Card Regulation: The Good and The Bad

I believe there is good regulation and there is bad regulation. Some people want no regulation at all, but I’m sorry, that just doesn’t work (Look at It’s Time to Regulate to see my thoughts on the subject) . The same goes for over-regulation. The key is to find balance.

As for the new credit card laws, I’ll start with the positive part of the regulation (which was passed). Here is an excerpt from a Yahoo! Finance article:

The new credit card rules, which go into effect in nine months, prohibit companies from giving cards to people under 21 unless they can prove they have the means to pay the debt or a parent or guardian co-signs. A customer also will have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance. Even then, the lender will be required to restore the previous, lower rate if the cardholder pays the minimum balance on time for six months.

And consumers also will have to receive 45 days’ notice and an explanation before their interest rates increase.

In general, the law is trying to curb the deceitful practices of banks which would fall in the “hidden fees” category. They’ll have to properly notify you of interest rate increases and not double your rate because you’re a day late with your payment. These kinds of bank practices remind me of the “Acai Berry” or “Free Credit Report” scam ads and programs.

The personal accountability maniacs may state that’s its your fault and that there is no need to do anything about these deceitful and unethical practices. However, I believe something should be done to protect the consumer if it is possible. First, why not? Second, unethical behavior should be punished. Third, things such as the “Free credit report” scams hurt other businesses online trying to sell legit products in an ethical manner. In general, these scams decrease overall trust and confidence which is not beneficial. As for the deceitful bank policies, they adversely affect people by destroying their credit and/or increasing their debt burden. In the aggregate, this is destabilizing for the overall economy and unnecessary (because it can be avoided with laws as the one just passed).

credit card size1 Credit Card Regulation: The Good and The BadThe bad regulation on credit cards that some were pushing for (but did not pass) involved capping interest card interest rates. Here is a Wall Street Journal Article that covers the issue. excerpt:

Despite complaints that banks and credit card companies are gouging customers by charging outrageous interest rates, the Senate on Wednesday easily turned back an effort to cap interest rates at 15 percent.

The 15% cap is completely arbitrary and nonsense. Additionally, these kinds of limitations are harmful to banks because it limits their ability to manage around different economic environments. An example would be the current crisis where credit card defaults are increasing and banks need to cover their losses (which could be through higher rates). With arbitrary caps, they’re toast.

And let’s not forget that it’s your decision whether you want to pay 30% interest rate on a credit card or not. If you don’t like the rates, don’t use it to get that plasma TV, that expensive dinner out, or other “unnecessary” consumer items. As for small businesses, they need to try to find another way to get credit.

In sum, you have the good and the bad. The good regulation that involves creating a more trustful environment for everyone and bad regulation (which did not pass) trying to cap things (such as interest rates) that must be set by markets.

Technorati Tags: consumer protection, credit card regulation, financial regulation

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