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You-Won't-Get-A-Credit-Card-Unless-You're-Rich Bill is Now Law

By Matthew Vadum on 5.22.09 @ 11:21PM

Amidst the anti-market frenzy in Washington, D.C., President Obama today signed into law a bill that will drive up interest rates on credit cards and force people with good credit to pay more to subsidize people with bad credit.

The bill, which extends a big, fat middle finger to credit card companies by limiting their ability to price their products according to risk, swept through Congress this week at breakneck speed.

According to Edward L. Yingling, CEO of the American Bankers Association, provisions in the legisation "will undermine the availability of credit." Credit cards are "a strong economic driver and are relied upon by consumers and small businesses to make payments and to bridge short-term financial gaps," he said.

Yingling said the legislation "fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk."

As John Berlau of the Competitive Enterprise Institute noted, limiting consumers' choices and interfering with sensible risk-based pricing practices "will result in less availability of credit and actually force card holders to pay higher rates in many instances."

The attack on the credit card industry was funded in part by left-wing philanthropist George Soros through his foundation, the Open Society Institute, as shown in "Consumers and Credit Cards: Leftist Watchdogs Attack An American Success Story," by Sara Wille, Foundation Watch, September 2006. (A related article is "Demonizing Subprime Lenders: Liberal Groups Oppose Consumer Choice," by Melanie Sans and Matthew Vadum, Organization Trends, October 2007.)

View all comments (20) | Leave a comment

Jeremy Trent| 5.23.09 @ 12:47AM

Great post!

Richard Saunders| 5.23.09 @ 6:03AM

Classify this legislation as Broken Clock (being correct twice a day). Soros and his stooges got this right as well. (I am sure if Soros were in the credit card business, we would have never seen this legislation.)

Credit Card companies were praying upon the most vulnerable in our society in the same way that the gambling/government lottery industry is. When I was first entered the work force in the early 70s, it was difficult to get a credit card. You had to establish credit incrementally, usually having a parent cosign a bank loan, then getting a department store or gasoline card and finally getting a bank card. Credit was earned and valued, unlike the recent years of instant gratification.

syn| 5.23.09 @ 7:23AM

Credit cards aside the sad reality is, the youth group ie., anyone under the age of 40, will be enslaved unto Serfdom for the rest of their poor, miserable lives.

I am so glad I am not under 40, stuck of the rest of their lives paying the largest credit card bill ever amassed by Washington, DC.

Have swell party kiddies, it will cost you everything...for the rest of your lives.

Becky| 5.23.09 @ 7:32AM

I wonder where the law of unintended circumstances will hit on this one.

jane| 5.23.09 @ 7:33AM

This Congress/Administration has yet to do anything but reward the irresponsible and damage the responsible. Eventually, responsible people will use only debit cards and the gov't will issue guaranteed credit cards to the irresponsible.

jean | 5.23.09 @ 7:45AM

Its no big deal to a) use debit cards b) not have any credit cards at all; its checks and stamps! Pia I will grant you.Cap One just sent out a blurb that cash advances will cost 20% interest!!I am not going to pay for the irresponsible!!!

Bill| 5.23.09 @ 7:58AM

In any financial dealings " Home , Auto , Or Credit Cards if you weed out the bad Customers you can afford to give good Customers a better deal at a fairer price . Being rich doesn't automaticly make a good customer of someone and being poor doesn't make a person a bad risk . This law should force lenders to be more responsable in their lending which will be benificial to responsable borrowers.

J. Kelley| 5.23.09 @ 9:06AM

This is all part of the plan to "spread the wealth" around. We get punished for paying on time. And folks who don.t get a reward. Also we are about the same as Europe with the unemployment number. This is where Obama wants us to go.

John Higgins| 5.23.09 @ 9:52AM

Irresponsible citizens are now victims. Responsible citizens must bail out the irresponsible citizens, be it their credit card bill, their mortgage, their bank or car company. Let's hear more about American values, Obama.

Bob| 5.23.09 @ 12:00PM

Well, I haven't posted in a while, but I decided to take a look at some of the misinformation that is posted. It looks like a bunch of people have commented here who know little about credit card profitability.

Actually, in this argument, BOTH sides are partially right and partially wrong. In the industry, credit cards are segmented into two major categories -- transactors and revolvers. Transactors generally have high FICO scores and pay off their bills every month. While credit card companies get their transaction fee of 1.5-2.0%, transactors are not very profitable unless they have other accounts at the institution. Revolvers, on the other hand, are very profitable. Revolvers with higher FICO scores are problematic as they can go to other credit card companies if the interest rate gets too high. Thus, you can only go so far in raising their rates. Therefore, it is not true that you can shift the burden to those with better credit ratings.

Those revolvers with lower credit ratings, on the other hand, will have a lot of difficulty moving to another credit card company especially when credit is tight and home values have decreased. Therefore, it is easy to raise their rates a few percentage points. Teaser rates historically bring in those with higher default profiles but especially those with lower FICO scores.

So it is true that people with lower credit scores get more of the burden. For years, many states have had usury laws limiting interest rates because unchecked, some companies charged upwards of 50%. That's why many credit card companies became national banks -- to charge higher rates since they would no longer be subject to state regulations.

Thus, there does need to be some regulation limiting interest rates as there is an oligopoly of credit card companies which results in a loosely organized cartel. I'm not claiming they're doing anything illegal, but when one company raises its rates on a segment, other companies soon follow.

The legislation probably goes too far in some areas, but making the contracts easier to read and limiting interest rates on the high end seems reasonable. Markets always work better when transactions are transparent.

Roy| 5.23.09 @ 10:18PM

The original poster does not convey much about the substance of the bill. Neither does the NY Times article that is linked. Most people are objecting to the undeniable diminution of freedom and the well known fact that such diminution usually has bad consequences.

If the substance of the bill is really encompassed by the linked CEI article(no raising rates when another card defaults, no college students, no teaser rates), then it is much ado about darn little. OK, it will suck for college students, and eliminating teaser rates is nanny state bull, but it does not "eliminate the ability to price according to risk". Nor does it sound like it goes all that far in eliminating the problem Obama was demagoguing about(confusing credit card agreements - teaser rates are usually prominently described as such - although the fact that the rate may change is not - but if this only prohibits one particular rate change circumstance, who cares?). But the CEI article is confusing about what may be included.

So what we see here is people reverting to type:

Most people see the state dinking around with an industry, know that is never good for an industry, and say so without getting bogged down in particulars.
Bob proclaims that he is superior.

jim rice| 5.23.09 @ 11:42PM

This bill sounds fantastic. Thanks for the post. Of course the head of the ABA would give a quote like that.....

Richard Saunders had a good point too... Credit should be earned... not given as almost a right.

Stan Redmond| 5.24.09 @ 1:52PM

Barney Frank will ensure those who can't get credit cards will be guarenteed credit cards. And when those people who are given credit never plan or were able to pay them off, the US government will back the debt. THEN, when the debts catch up after being creatively packaged in bizaar trade schemes, the credit market will collapse. BUT, Barney Frank will also ensure those credit institutions that are too big to fail will be bailed out with nonexistant tax payer dollars. Or...was that the subprime housing market?

GC| 5.25.09 @ 5:08AM

this bill impacts small business owners disproportionately. many small businesses rely on credit cards to pay for inventory expenditures the month and then pay off the bill in full each month. this is especially convenient when dealing with foreign suppliers and currencies. if interest starts to accrue from the transaction date instead of the "payment overdue date", it's an extra business expense that did not exist previously. take for example the businessman who spends $50K per month on inventory purchases from all around the world. he pays off his bill each month in full and never pays any interest. the use of the credit card makes his life much easier. after Obama's bill, the same businessman will now owe $50K + interest each month even if the bill is paid on time. how much will that interest be? $500 per month? $1000 per month? there is no way to get around it and forsaking the use of the credit card leads to other fees (such as bank fees paying foreign suppliers by bank wire). so what's he supposed to do? raise his prices in a tough economoy.

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