Smart Borrower Blog

Credit Card Bill Punishes Responsible Borrowers

Once again financially responsible Americans are being forced to take one for the team. The U.S. Senate voted 90-5 Tuesday in favor of a law that would put tighter restrictions on credit card companies, in an effort to keep unsuspecting borrowers from being duped into higher fees and rates. If the bill becomes law (and it is expected to easily pass the Senate and win President Obama’s signature)   it will effectively punish those who understand how credit cards work and who use them wisely.

Among other things, here’s what the bill calls for:

• Borrowers under the age of 21 must prove their ability to repay charged purchases or provide an adult cosigner.
• Credit companies would no longer be able to increase borrower interest rates in the first year.
• Promotional interest rates would be required to be effect for six months or more.
• Companies would be prohibited from raising rates on balances until the cardholder is 60 days late on their payment. The company would also be required to restore the original rate if the cardholder pays on time for six consecutive months.

Does anyone else see how this bill will end up being counterproductive to its goal of helping the down and out? Credit card lending is inherently risky to banks and in order to compensate for that risk, they need to be able to increase interest rates when consumers default or get behind. The banks have no collateral to repossess; they have to be able to charge higher fees as a means of encouraging customers to pay on time. With a new slough of restrictions put on their business practices, they will be less profitable and less likely to offer credit cards to those who are in the most need of credit in this precarious economy.

And at the same time credit card companies will likely alienate their "good" customers. Here’s how Peter Cohan on the Dailyfinance.com blog   explained it:

…People who pay their entire bill each month are — in the view of the credit card companies — freeloaders. So if this bill becomes law, the companies will make up the lost revenue by charging annual fees for cardholders and charging interest from the moment the cardholder pays.

If that happens, I am going to cancel all but one of my credit cards, use that one card as rarely as possible, and start paying cash or check for everything else.

I whole heartedly agree. I’ve heard plenty of talk that companies would likely limit their cash-back and other rewards programs. The cash-back incentive is the only reason I use my credit card each month, and I would absolutely cancel my account immediately if new fees are imposed or the cash-back rewards are cut. So in short, those who have been responsible with credit will stop using it all together and those who need will not be able to get it, and the government will have permanently taken control of one more private venture.