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

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Risk-based pricing allows card issuers to offer a greater variety of card products, bringing choice and convenience to a wider range of borrowers.

A credit card borrower’s likelihood of repaying a card balance (a balance that can grow through additional purchasing) changes over time.  Information about the customer’s use of credit extended by other lenders, which also changes over time, is predictive of payment default. Risk models that use this information are required by law to be “empirically derived and statistically sound.”  The bill’s proposed ban on practices such as universal default would lock a lender, for the life of the account, into the underwriting assumptions that were made prior to the opening of the account.

Risk-based pricing permits price modifications for customers who expose the lender to increased risk, while benefiting other customers with lower credit costs and greater access to credit. The alternative, which this bill would bring about, is a combination of more stringent upfront underwriting standards, a contraction of credit availability, and higher credit costs for all consumers.

While some issuers use universal default to price their loans, many others do not.  If consumers find that this pricing method does not best fit their financial situations, they are free to take their business to an issuer that does not use universal default.  If the lower “ex ante” – or before the fact – estimate of the borrower’s likelihood of default provides them a lower interest rate, they may benefit from this pricing method.   As long as the borrower does not have a negative change in his or her credit status, there would be no default to re-price them, universal or direct.