As a guy with a banking background and a distaste for how bills actually come to be in Washington, I wasn’t too impressed with the Credit CARD Act passed in the spring of last year. I was never going to put too much effort into reading all the fine print, but I trusted that the banks probably wouldn’t like the regulation, but would soon find enough holes in the bill to still maintain their profitable credit card businesses.
And duh, they did. First, the credit card companies were banned from raising your interest rate in the first year you owned your card. No problem, they just jacked up the rates on the card before you sign up. In the last 22 years the spread between the average credit card rate and the prime rate has never been wider. The prime rate is the base rate banks charge their best customers. You could almost consider it the wholesale price. But the spread could indicate increased credit risk. If the card owners are defaulting, interest rates would rise; and we are in a recession so that’s possible. But, default rates are almost exactly the same (according to S&P/Experian) as they were when the bill passed last year. The Chicago Sun Times has a good article about the spread between credit card rates and the prime rate and includes a good chart of the two, but doesn’t talk about defaults, you’ll need the S&P/Experian link for that.
The banks have come up with another brilliant idea as well. The CARD act was only for consumer credit cards. Business credit cards can be just as profitable. Businesses use cards to smooth out cash flow and as a source of quick financing. In the first quarter of 2010, issuers mailed out 256% more business credit card mailers than they did in the same quarter last year (the last quarter before CARD was passed). The business credit card really isn’t much different from a normal card. You can get one for yourself, and they can carry better terms (at least advertised terms) and higher credit limits. Considering the recession and reduced business spending, you should probably have seen a decrease in business card offers, or at least something less than a 2.5x increase.
I’m not calling out the banks and card companies. I think they’re doing exactly what you should expect them to do. They are operating within the legal framework they were given. Washington failed to phrase the bill in a way that actually protected consumers from much. I shouldn’t say failed. I think because many of them are in the pockets of lobbyists they passed the exact bill they wanted to. They look good for protecting the consumer in the front and give banks opportunities to continue to make money in the back. Win-win in their world. If bills were written in plan English and limited to an 8×11 piece of paper, we wouldn’t have this problem. I was never a fan of CARD, mostly because I never really thought it would do anything it was supposed to do. I can’t wait to see what banks circumvent next, they do have 2200 pages of financial regulation to figure out. Can’t wait for next year!
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
