'Help' that hurts
A high-school student recently emailed me to ask my assessment of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD). With this legislation, Uncle Sam regulates the terms that may be legally agreed upon between credit-card issuers and their customers.
In particular, CARD strictly regulates late fees and interest-rate hikes on delinquent debtors.
Congress, the White House and most of the news media describe CARD as "pro-consumer." At first glance this description seems accurate. After all, don't consumers benefit when the fees and interest rates they must pay are reduced?
Although the answer to this question is "yes," this isn't the correct question.
The correct question is, "Don't consumers prefer to have the option of paying higher fees and interest rates if the alternative is having no access to credit at all?"
Not everyone is financially careful or responsible. Traditionally, credit-card issuers dealt with this fact not by refusing to lend to consumers with poor credit scores but, instead, by using an ingenious approach that helps both those consumers with poor credit scores as well as the banks that lend to them. That approach is to charge delinquent customers significant fees for late payments and to raise interest rates on delinquent balances.
These fees and higher interest rates might seem harsh, but they do two things to keep banks lending to people who would otherwise lose access to credit.
First, the prospect of penalty fees and higher interest rates gives borrowers stronger incentives to pay on time. So some people who might otherwise slip into financial irresponsibility are motivated to behave responsibly to avoid these extra charges.
Second, these penalty charges compensate lenders for the greater risks of lending to consumers with poor credit histories. Chances of default for borrowers with histories of late payments are higher than for borrowers who regularly pay on time. So it's more costly to lend to late payers than to on-time payers.
By restricting lenders' abilities to charge late fees and to raise interest rates, CARD denies lenders a chief means of encouraging customers to pay on time.
Like so many other statutes sold as being "pro-consumer," CARD hurts consumers, especially low-income consumers.
As obvious as this truth is, many politicians don't get it. They cling to their faith that regulations never create incentives for people to do what politicians don't want people to do. Politicians don't want lenders to cut back on lending to high-risk customers, so politicians exercise blind faith that their legislation will not prompt lenders to act in this way.
Curiously, though, politicians aren't so naive when it comes to taxes.
If politicians were as naive about taxes as they are about the consumer-credit industry, Congress and the White House would demand that the IRS treat delinquent taxpayers with much greater kindness -- say, by reducing fees and interest charges for late payment of taxes, and by eliminating jail time as a punishment for tax evasion.
If regulations create no incentives for people to act in ways that politicians dislike, restricting the IRS's ability to penalize delinquent taxpayers would cause no rise in tax evasion and delinquencies. Revenue collected by the IRS would be unaffected.
So the fact that the IRS continues to punish delinquent taxpayers with fines and penalties far greater than any ever dreamed of by credit-card issuers suggests that when it comes to revenues that hit close to home -- taxes -- politicians do , in fact, understand something about economics.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- McIntyre students hope Buddy Bench is beneficial to all
- Pitt’s Dixon monitoring minutes
- Open records office orders Mt. Lebanon to release deer cull emails
- Tomlin: Steelers as healthy as can be expected at this point in season
- Bowl destination is at stake for Pitt football in regular-season finale
- Vatican puts 5 on trial for leaks
- Philippines reappraises hoard of Marcos jewelry
- Stocks shake off Middle East tensions, drop in consumer confidence
- Steelers not giving up on wresting AFC North from Bengals
- Rookie linebacker Chickillo adjusting to role with Steelers
- Steelers notebook: Players get back to work after bye