I always wonder why people like to portray credit card companies as evil. Today, Obama came out against credit card companies. I will admit, I am not your average credit card user. I have actually only carried a balance on my credit card once, and that was because I had forgotten to pay the bill. So perhaps I am not the best person to comment on credit card company practices. But the way I see it, people do not have the right to credit. You do not have the right to borrow money at a low rate. These companies are providing you something you would not otherwise have and nobody can force you to buy something on credit.
Obama wants to limit the amount that credit card companies can raise rates and make sure that the language in their contracts are clear and easy to understand for the consumers. I'm all for the latter, as I think people need to interact with each other in clear and transparent ways, but I am again not sure this is going to give us what the President is after. The law of uintended consequences is bound to take hold here. If credit card companies can not charge high rates, they will be less likely to lend to people of questionable credit worthiness since they cannot make money on these people. These are often the people who most need to have some form of credit available to them because it is not available otherwise at any price.
Now, this might end up being a very good thing for our society as a whole. I think we all need to have a little less debt. Especially credit that costs as much as credit card companies charge. But on an individual level, I can see this playing out badly. People who truly need to use the emergency funds that credit card companies can provide will be unable to. Where will that leave them?
Most people know what they're doing... Now they might be overspending, but they know what's going on. As for the interest rates, if you were a high risk candidate to begin with, the credit companies usually offer you two options: high interest plus low credit limit or a secured card (meaning you give them the money upfront and that is essentially your limit). Why bother with the second option? To build credit history. The first option may sound bad initially but that is only the beginning. If you maintain a good history with that credit card company, in a few years you can call in to request a lower interest rate as well as increasing your limit. Nine out of ten times, they will agree. I have done this many times when I first graduated from college. So this leaves me to think that the people who are struggling with high interest rates are people who have been late on their payments and are very close to their limit... which of course then causes the snowball problem of the lendee only being capable of paying the interest and never the principal loan amount. Again, those people knew that they were spending too much. They were the ones swiping their credit cards.
ReplyDeleteI haven't read his proposal, but limiting how much rates can get raised does not mean that high rates can't be charged. The statement just limits the rate of change. Regardless I do think folks do need learn credit better.
ReplyDeleteFair point. As much as I do not like regulation, I actually think it would be fair to not allow any interest rate changes on past purchases. You could increase the rate on all FUTURE purchases, but not change the terms on previous balances.
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