Would a Credit Card Bill of Rights Ultimately Help or Harm Consumers?

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This bill will raise the cost of credit for everyone and reduce access to those who need it the most by dictating how credit card issuers can price their products.  While the bill does not explicitly mention the government “setting rates or terms,” the prohibitions of certain practices will have the same effect, thereby harming consumers.

By prohibiting adjusting interest rates based on changes to the original underwriting assumptions about the borrower’s ability or willingness to repay, this bill effectively “caps” the Annual Percentage Rate (APR) on these accounts for the life of the account. This requires that costs of extending credit to riskier borrowers be covered through higher prices (initial APR, fees) or by tightening qualification standards, lowering credit lines, etc.

Prohibiting issuers from using a particular balance computation method reduces the interest that is derived from that method. The shortfall must be made up through additional or higher fees or APRs, shorter grace periods, or other changes.  In addition, limiting over limit fees to once monthly and three times consecutively is a fee cap that reduces borrowers’ incentive to keep spending below their credit.

To see the negative effect this legislation would have, we can look at a similar effort by the United Kingdom to limit “default fees” (or penalty fees).  In 2006, the U.K.’s Office of Fair Trade took action to reduce credit card default fees, capping them at $24, down from about $40.  The result in this price decrease for the riskiest customers led to increases in APR, reinstitution of annual fees and a 60% jump in credit denials.

Recognizing the negative connotations of “price controls” and the effect they have had in the past, supporters of H.R. 5244 naturally shy away from such claims about this bill.  However, as a result of this bill, the government will control the price of loans given to consumers of varying credit profiles.  AFSA urges Congress to consider the unintended consequence of driving up consumer costs or impairing consumers’ ability to obtain credit from regulated financial institutions.  As we have seen in the U.K., the cost of credit would rise, while access would decline.