Cynics Unlimited

In the shadow of the US Government’s massive subprime lending bailout, the House of Representatives passed legislation HR 5244, better known as the Credit Cardholders’ Bill of Rights Act of 2008. Designed to curb the growing torrent of credit card consolidation and bankruptcy filings, the bill bans or limits several lending practices, including:

• Increasing the annual percentage interest rate (APR) on the outstanding balance without the customer acting delinquently on the account in question.
  Example: John’s FICO credit score drops by 70 points over several months. Although he has never missed a payment on his credit card, the lender sees him as a default risk and raises his APR from 19% to 34%
• Using APR increases as penalties without a 45-day written notice
  Example: Suzy has missed several payments over the past year. On September 3, the bank decides to raise the APR on her card. The increase effects all purchases starting September 10. Suzy does not become aware of these changes until she receives her bill later in the month
• Double Cycle Billing – using the previous month’s balance to calculate interest due on an outstanding balance
  Example: Jim owes $1000, payable by September 30. He pays $550, ensuring he is not delinquent but leaving $450 due. Most lenders calculate interest due based on the average daily balance and interest for the billing cycle (e.g. $1000* 19.5% * 25 / 365 = $13.36 interest) , but lenders who use double cycle billing take the average of the current month’s balance and the previous month’s balance. Thus, if Jim spent $2000 the previous month, the interest would be calculated on $1500 rather than $1000 (interest = $20.03).

This consumer-friendly legislation subscribes to the widely-held belief that those who use credit should be absolutely protected against unscrupulous lenders and their willingness to prey on so-called high risk customers. These customers are often considered by lenders to be profitable due to their tendency to revolve (retain a partial balance after the payment due date and pay interest fees as a result). This practice of targeting economically vulnerable customers has been examined at length by several industry observers and authors like James Scurlock, creator of the book and film “Maxed Out”:

“I think that most people think banks are still rationing out credit to people who’ve “earned” it or people who “deserve” it. That’s certainly what they want us to believe. But the truth is that banks are pushing credit onto people who will pay them the highest fees and the highest interest rates. That’s the real definition of “valued customer.”
-The Filmlot. Interview with James D. Scurlock

There is little doubt about the existence of predatory lenders and their practices; however, North American consumers must remember that we live in a free market society and the customer is not FORCED to use any of these products. Perhaps congress should have also passed a Credit Cardholders’ Bill of Responsibilities. Based on various self-help guides (all of which promise to solve your financial problems for the low, low price of $19.95) and my own observations, such a bill should contain at least the following clauses:

1. Read the entire credit agreement before using a card.
2. Avoid withdrawing cash on the credit card.
3. Avoid using credit cards to pay off other credit products (especially mortgages)
4. Do not spend over the basic credit limit, even if doing so is permitted
5. Avoid using credit cards for the purchase or down payment of rapidly depreciating goods, like automobiles

Unlike the rights bill, the responsibilities bill could not be actively enforced; however, a customer that repeatedly violates its guidelines should have no expectation that the government is going to bail him/her out in the event of delinquency. Many of the practices banned by the Cardholders’ Bill of Rights are used for risk management strategies designed to punish unreliable clients. Some lenders may respond these new restrictions with more drastic risk management tactics:

• Severely limiting who qualifies for and retains credit cards (students, small business owners and low income residents would almost certainly be affected)
• Passing the delinquency costs onto the entire portfolio via extra fees and increased interest rates.

Without at least the spirit of consumer responsibility, the legislative measures designed to protect society’s most vulnerable consumers may in fact cause them more grief in the long run.

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