Will Credit Card Legislation Really Make People Start Saving More?

Today the House has pushed forward legislation to credit a consumers’ credit card bill of rights, so to speak. The bill is apparently a response to cries from consumer advocacy groups about "unfair" practices by credit card companies. Some of the requirements of the proposed law seem helpful, but some of them seem like ridiculously over-legislating and interfering with the private sector.

Here’s what sounds reasonable:
The bill would require credit card companies to give their customers 45 days notice before increasing interest rates or changing other contract terms. It also calls for an end to "double cycle" billing, which allows the companies to charge interest on debt that was already paid back on time.

Here’s what sounds over the top:
Credit card companies would be prohibited from increasing rates on any existing cardholder balances, except in a few situations. Companies charge specific interest rates to each individual based on their credit history and other market factors. If my credit card company tries to hike up my rate, I switch companies. I don’t really think I need a law saying that they can’t raise interest rates.

Here’s something iffy:
The legislation would not allow credit card companies to charge fees for payments made online or by phone. Not all companies do this. Those that do may have sinister motives, like trying to make it harder for people to pay on time, meaning more late fee money for the credit card companies. But I say let this issue up to the free markets. I would never personally choose a company that would charge me for pay online. And if enough people start realizing they do not have to pay such fees, they will probably switch companies, without the need for a invasive law.What scares me (and apparently plenty of other people) is what Congress and the Obama Administration (who are firmly behind the bill) hope to accomplish with this legislation.According to JLP on the allfinancialmatters.com blog, the Obama team believe they can make people rely less on credit and start saving more through this bill.JLP quoted the Wall Street Journal from Tuesday:

Over the weekend, White House economic adviser Lawrence Summers said President Obama would focus on "credit-card abuses" and "the way people have been deceived into paying extraordinarily high rates that they wouldn’t have paid if they knew what they were getting themselves into."Mr. Summers, speaking on NBC’s Meet the Press, added: "We need to do things to stop the marketing of credit in ways that addicts people to it and so that our households are again saving, and families are again preparing to send their kids to college, for their retirement and so forth.

I tend to agree with JLP’s analysis of the situation:

I’m not sure that people were really deceived into paying high interest rates. I’m pretty sure all the terms were spelled out in the fine print. If they weren’t then people should have the right to take legal action.I also think Mr. Summers is smoking something if he thinks the big bad credit card companies are the reason why people aren’t putting money back for their kid’s college educations.

If people are so stupid that they are "deceived into paying extraordinarily high rates" do you really think they are going to be smart enough to figure out how much they should be saving for their kid’s college education?

For me the bottom line is: if this law makes it easier for people to use credit and get rid of their fees, they will become more addicted to it, not less and certainly won’t be encourage to start saving their money. If getting people “detoxed” from credit is the point of the bill, it’s not likely to be effective.

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One Response to “Will Credit Card Legislation Really Make People Start Saving More?”

1. Luanne Pluck says:

   June 29, 2011 at 4:42 pm

   The housing market is already at rock bottom. Now the May Mortgage Report just revealed that there is a tremendous number of new foreclosures in the pipeline, building up way more rapidly than they are being reduced by foreclosure sales. How can this not result in the home loan market collapsing even further?