Charging Ahead With The Credit Card Bill

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Congress has passed a bill that would enact sweeping new restrictions on the credit card industry. The bill does away with arbitrary rate hikes and bans issuing cards to minors.

MICHELE NORRIS, host:

If the procedures for getting the credit card bill through Congress were unusual, so is the bill itself. Many industries do things that are unpopular. One personal bug-a-boo is the way drycleaners charge more for women's shirts than men's, and then there's those extra charges for airline luggage.

But Congress is not tackling those issues. Well, NPR's Planet Money team has been looking at the credit card case and why Congress is stepping up this time. We asked NPR's Adam Davidson to explain, starting with the basics of what the bill does.

ADAM DAVIDSON: Basically, the idea is to make it so that consumers can look at a credit card offer and actually have a pretty good idea of what that offer is, what the interest rate is and what it is likely to remain for some period of time, what they're expected to pay and when they're expected to pay it. I think we've all had that experience of not being quite clear on what the credit card company is charging you for, why the interest rate is changing, when it's going to change. So the goal here is to make that clearer and to, frankly, limit the credit card company's abilities to make changes as quickly and often as they do.

NORRIS: And to make sure that people know when those changes are happening. Is that correct?

DAVIDSON: Right. And to give them plenty of notice.

NORRIS: Now, as we mentioned, there are lots of corporate practices that are unpopular with consumers. What makes this one different? Why did Congress have to step up?

DAVIDSON: Well, one thing is just pure politics. There has been a group of consumer activists who have been fighting for this kind of legislation for a very long time, but credit card companies and banks have been rather powerful. This just, obviously, is a year where the banking industry and the financial services industry is not as strong as it has been in the past, and consumer advocates are much stronger. So there's just pure politics.

But some of the advocates make an economic argument, and it goes something like this: that the fundamental business model of credit cards requires an interest rate that is much higher than what most of us see. The real interest rate that the bank needs to charge for this, actually, very strange kind of credit - it's unsecured, it goes to almost everybody - that the banks really need to make something like 30 or 40 percent interest to make enough money to make this business worthwhile. But nobody's going to accept a 30 to 40 percent interest rate, so the banks have been hiding it. They've been hiding it in late fees. They've been hiding in all sorts of strange charges, like being charged to pay by phone - what the advocates call tricks and traps.

So they say that the fundamental business model is deceptive, and that makes this different from other maybe annoying businesses that have all sorts of charges. And that's why Congress has to step in.

NORRIS: So those advocates make a strong argument. But you could also say this is selective governance. What about the other side? What's the economic argument to leave credit card companies alone?

DAVIDSON: Well, the economic argument is like with any competitive business. Economists and banking advocates would say, hey, there is a vital, vibrant competitive marketplace. If consumers really wanted these kinds of simple rules, and if consumers were willing to accept slightly higher interest rates to get them, then some bank or credit card company would have offered that product. But we continue to do business with the credit card companies, so clearly there is a market for those credit card products.

NORRIS: What can we expect to come out of this legislation?

DAVIDSON: Well, it does seem clear that this limits the ability of credit card companies to make money in other ways, so they're going to have raise interest rates. It probably is on balance negative for credit card consumers who have good credit, who pay their bill every month and stay on top of their interest rates and other information. Those people are probably not going to have as attractive products available. But on the flip side, it does seem that some of the lower credit risk borrowers who keep a balance on their account will have better products in the future.

NORRIS: Thank you, Adam.

DAVIDSON: Thank you, Michele.

NORRIS: And for more on the mysteries of plastic, such as why credit card companies like costumers who buy premium bird seed, you can head to our Planet Money blog and the podcast at npr.org/money.

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