Time to Reform the Credit Card Industry

President Obama is now tackling the issue of abuses by credit card companies. Obama Pressures Credit Card Issuers on Rates.

Following up on pledges he made during the election campaign to curtail the high fees and rates, the president called the top executives from the nation’s largest credit card companies to the White House to pressure them to take steps that officials say would reduce abusive practices.

And indeed this was a prominent issue with candidate Obama while campaigning in Iowa back in December 2007. Obama Targets Credit Card Industry

Obama (accused) credit card companies of deceptions.

"Many credit card companies are tricking Americans into agreements they can't afford because that's how they make big profits," he said. "Well, no company's bottom line should come before what's right for the American people."

He said many consumers are squeezed twice, with credit card debt forcing them into bankruptcy, where the odds are also stacked against them.

In addition he said that much credit card debt comes from consumers who have been forced to use credit cards to pay for medical costs. This is another example of how so many of the issues President Obama is addressing are related to each other and need to be tackled at the same time. While the topic here is credit card practices, it needs to be pointed out that if Americans had universal access to affordable health insurance, they likely wouldn’t need to use credit cards to help pay for health care and possibly be forced into bankruptcy.

What’s not to like about credit card industry practices? For one thing, there are those really high rates of interest they charge at a time when the cost of money for these institutions is so low. While we hear about how credit is tight, companies like Capital One bombard the airwaves with endless commercials for their astounding array of credit cards charging from about 14-15% interest for those with “excellent” credit to 23-25% interest for those with a “limited” credit history. It is also worth pointing out that these rates are ‘variable’ so they are subject to change (usually upwards) for any number of arbitrary reasons like being late paying other bills. PBS’s Frontline documentary Secret History of the Credit Card explores issues surrounding industry practices in depth and can be watched online in its entirety.

And while one can say that some people who use these cards may be gullible, there is no denying that the persuasion to use these cards through advertisements is enormous with its enticements of cash back rewards, points, and teaser rates. And now Capital One gives you the ability to design your own card with a photo of your choosing as in that thoroughly annoying "Spaghetti Jimmy" commercial.

And to make sure that as many young people as possible will be hooked on credit cards, the credit card companies have arranged some sweetheart deals with colleges as I wrote in a previous posting, Colleges and Credit Cards.

Not surprisingly, The Wall Street Journal offered this much more industry friendly perspective in Senators Sort Out Curbs on Credit Cards.

Faced with mounting losses, credit-card companies have changed terms for large swaths of customers. They are trying to avoid bleeding more money -- or to make up for losses -- as many cardholders lose their jobs and see their incomes squeezed in a recession.

Many Senate Democrats want stricter limits on card companies' ability to raise rates on consumers who are paying their credit-card bills on time. But most Senate Republicans want credit-card companies to have the right to establish a price for credit based on risk. That means adjusting terms if a consumer's credit quality has deteriorated -- even if that consumer hasn't been delinquent.

This is a form of double-dipping that auto insurance companies benefit from. If someone has an accident, they can then raise the rates. But even if a driver doesn’t have an accident, they can still raise the rates based on a supposed increased risk.

Fortunately, the readers who offered comments on this article aren’t buying any of this. Here is an excerpt from reader Peter Von Nessi:

What logic is there in allowing rates far exceeding state usury levels, under the guise of providing credit to the less creditworthy, when it is those very people who are judged as likely to have trouble paying back what they borrow? What is this inane insistence on saddling people with debt who are least able to afford to pay it back? It's obvious as to what's going on here. There is a concerted effort to try to extract a profit by charging exorbitant rates and fees by whatever means possible, and the Congress and Fed are duplicitous in their acquiescence.

The dirty truth is that the issuers don't want the borrowed money back before interest and fees kick in. There's no profit in those who pay in full during a grace period. Issuers get into this business precisely because of the frequency of entangling someone in a 30%+ interest net; precisely the people who shouldn't be borrowing in the first place.

Both the House and Senate have bills in the works and are facing a final showdown in Congress with something expected to be signed into law by Memorial Day. It can’t come soon enough. But unfortunately, even if or when the bills are signed into law, there are provisions that the effective date of the law won’t be for another 9 to 12 months after the bill is signed by President Obama. Why is that necessary? Many fear that the credit card companies will take advantage of this grace period to screw their cardholders out of even more money with more manipulation of rates and terms while they can.

The anti-regulation mentality of the previous presidency towards the financial services industry has resulted in so much pain for so many people. The credit card industry has inflicted more than their share of this pain with some of their abusive practices. It’s about time we have a president who is doing something about it!