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

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Government regulations would hurt everyone, but the poor—and those with bad credit—would suffer most. New regulations such as a “credit card holders’ bill of rights” would harm all groups of consumers. People who use their credit cards, understand their interest rates, and pay their bills on time would almost certainly begin to pay higher interest rates. The proposed regulations, on the whole, would increase the cost of being in the credit card business. While some credit card companies might try raising fees on merchants or asking their stockholders to accept lower returns, it’s overwhelmingly likely that credit card holders themselves will end up paying the price. Because credit card companies—by definition—have ongoing billing relationships with their customers, it’s very easy for them to pass the fees on to their good consumers. For most people, this might mean a few dollars in extra annual fees on a reward card or 50 to 100 extra basis points in interest.  The proposed law’s ban on using most credit report information and its caps on interest rates, indeed, make almost sure that this will happen.

For those with bad credit or low incomes, however, things will get much worse. Credit card companies will find that issuing credit cards to such marginal borrowers just isn’t worth the risk. Residents of inner city neighborhoods, college students, striving entrepreneurs, and people starting out in life will see credit dry up.  We know what will happen, indeed, because credit was generally unavailable to these groups before the 1978 to 1996 wave of banking deregulation gave banks and credit card issuers the authority to extend credit to these groups.  Many will have to rely on “secured” credit cards (silly financial instruments that require bank deposits against the credit line), and some may have to turn to unconventional—and even underground—money sources.

It’s probably not an exaggeration to say that, for every well-healed college student a “bill of rights” might keep out of debt, a start-up business will end up folding for lack of sufficient capital. The “bill of rights” represents an effort at class warfare on the part of well-healed activists.