Claire's Random Thoughts

That’s right, calling the new bill, H.R. 627, the Credit Cardholders’ Bill of Rights is misnomer if not a disgrace to what any “Bill of Rights” should stand for. In fact, for responsible cardholders, this may prove to be the opposite of a bill of rights, because it will ultimately detract from responsible cardholders to pay for the revenue lost from irresponsible cardholders.

Here’s why:

On the surface, and in the land of unicorns and fairies (which is the land politicians are trying to convince us we live in), this bill appears to have good intentions to protect consumers from being taken advantage of by creditors. The reforms listed here sound good, don’t they?

The main changes:

1. Universal default eliminated. That is, if a consumer defaults on one account, other creditors do not have the right to assign the default rate to other non-delinquent accounts.

2. No charging over the credit limit fees when a consumer has exceeded the credit limit due to finance charges or other fees imposed by the credit card company.

3. No interest rate increases allowed for late payments unless the payments are over 60 days late. Consumers must also be notified at least 45 days in advance of any rate changes.

4. No more double-cycle billing method for computing interest, that is calculating interest over two billing cycles, a method was previously used to ruin grace periods.

5. A cap on credit lines for college students or people under 21 of $500 or 20% of annual income.

These are not all the provisions of the bill, but they are some of the most important. The full text of H.R. 627 can be found here. This bill is known as a “bill of rights” because it typically means that banks are less able to use tricks to trap laypeople into excessive interest and fees. However, most of the new provisions are most beneficial to less responsible cardholders who usually fail to do their research in the terms of their contracts as well as borrow excessively.

1. This is perhaps the only provision that I do not find unreasonable. In the past, some credit card companies would raise interest rates for non-delinquent accounts simply because the consumer defaulted on another account. This can be argued to be unjust, so I won’t argue against this provision for now.

2. No matter what causes a consumer to exceed a credit line, he/she should be responsible enough not to “max out” credit cards in the first place. Consumers who normally have more trouble paying back debt and are regarded higher risk are the ones who tend to max out their cards. Consequently, it is not unreasonable for them to be charged extra for their irresponsibility, especially since they pose a higher risk to creditors, and creditors do charge higher risk groups more. In summation, exceeding a credit line is exceeding a credit line, no matter what the cause. The consumer should take the responsibility to stay under the credit limit to avoid the “over the credit limit” fee that the credit card company has every right to charge, regardless of the cause.

3. This provides less of an incentive for consumers to pay on time. Revolving credit is extremely flexible, and minimum payments are rather low, so it is not unreasonable for creditors to expect timely payments. If a consumer cannot even afford to pay the minimum payment on time, then that is a sign of financial trouble and higher risk, which means that the credit card company should be allowed to charge more to compensate for such risk.

4. When a consumer applies for a credit card, it is his/her responsibility to read the contract and know how payments are calculated. Don’t like this billing method? Don’t get the card. Or just don’t carry a balance on that particular card.

5. This provision, out of everything in the bill, bothers me, personally, the most. “College student” is defined as either someone in college (go figure) or under the age of 21 (or both, of course). This bill will cap credit lines on any single card to either 20% of the student’s annual income or $500, whichever greater. It also caps the total amount of available credit to 30% of the student’s annual income “Unless a parent, legal guardian, or spouse of a college student assumes joint liability for debts incurred by the student in connection with a college student credit card account”
Actually, I’m wondering what happens to existing credit lines that are far greater than these limits. It will be ridiculous if I have to give up my tens of thousands in credit lines that the banks voluntarily assigned me and I have always used responsibly because of this new ridiculous regulation. Sure, college students often don’t have much money, but shouldn’t the amount of credit extended still be up to the creditor-debtor relationship? This is why credit card companies should start small for college students and increase based on responsibility. There is nothing wrong with credit card companies electing to give out low $500 credit lines to college students, but it definitely shouldn’t be a limit if the cardholder can handle more responsibly. Again, these credit card companies increased my credit lines voluntarily because I proved myself as a responsible and deserving cardholder. I always have cash to back my purchases, so what’s the problem with giving me a little more leeway? Sometimes that $500 limit isn’t even enough for a single purchase! Such ridiculously low limits, which mean practically no borrowing, will make it extremely difficult for young adults to build a good credit history, which will make it more difficult for them to apply for mortgages or car loans in the future.

How does this ridiculous for responsible consumers?
The credit card adviser from bankrate even agrees that good cardholders may suffer under this new law. This new bill will cause credit card companies to lose an estimated $10 billion per year in pre-tax income. Thus, credit card companies will have to think of new ways to raise revenue or reduce expenses, and this will result in good cardholders subsidizing the $10 billion loss caused by lost revenue from irresponsible cardholders. This may include shorter or the elimination grace periods, and reduction of rewards programs. Shorter grace periods affect responsible consumers, because people who use credit cards for convenience and rewards and pay their balances in full will be charged interest for their purchases, even when they have cash to properly back such purchases. Rewards programs are the main reason such responsible consumers use credit cards. Using a credit card while you have cash to back the purchase, collecting rewards points, paying the balance in full without interest, and redeeming the rewards for purchases that would have been otherwise made with cash doesn’t sound too shabby, does it? Too bad the era of grace periods and rewards may end, or at least be considerably reduced.

While this bill may appear to have good intentions, it is flawed in a way that unfairly hurts creditors, which in turn, will cost responsible consumers. It also unjustly penalizes younger consumers, like myself, who have demonstrated the ability to use credit responsibly. Is it right to give irresponsible cardholders a break when the creditors’ lost revenue will be subsidized by responsible cardholders?