Credit Card Reform: Populism vs. Practicality

The recent bill designed to cap credit card interest rate hikes and excessive fees that had an overwhelming amount of bipartisan support in the Senate is a perfect example of how our elected officials put politics ahead of doing what is prudent. Angry constituents have demanded that the government crack down on the credit card industry for charging them outrageous interest rates and fees. As a result, Congress responded to the populist outcry as elections in 2010 are quickly approaching. Lawmakers have completely ignored the fact that the last time the government attempted to meddle with interest rates (almost three decades ago), the results were not what lawmakers intended, which is indicative of most demand-side policies. However, it’s safe to say that no politician on Capitol Hill would recall that incident or be brave enough to put policy ahead of their political career to make the following points:

Credit card interest rates are OPTIONAL:

How many people realize that money can be borrowed free of interest for the duration of the grace period? If people pay off their balance when the bill comes, then they have had the benefit of borrowing money interest free for 25 days – the typical grace period. Instead, most people abuse credit cards and borrow more than they can afford to repay. Senator Chris Dodd D-Conn says "This is a victory for every American consumer who has ever suffered at the hands of a credit card company.”(1) Senator Dodd’s logic is perplexing. How is it that the consumer has suffered when consumers have the ability to decide how much or if they would like to borrow any money on a credit card?

Interest rate caps restrict the flow of credit:

This actually might be a good thing as the lending industry is not entirely innocent. Although it is clear that people have abused credit, the lending industry is equally guilty of extending too much credit to consumers. However, it is best that this problem be solved without government intervention seeing how well the government’s involvement went with the housing sector. High interest rates will curb borrowing, which is necessary in certain phases of an economic cycle; however, government overreach during a recession can place too much of a restriction on credit flow. Since the beginning of the “economic crisis,” the term “frozen credit markets” has been frequently discussed. If this economic crisis is as serious as politicians have made it out to be, then why pass a measure that will further restrict the flow of credit, which according to them, will make things worse?

It is best to let the private industry work with their customers who are having a hard time paying their bills. There are many services available to customers from their lenders that surprisingly exist without “big government” passing laws. It is in the best interest of the lenders to recoup some of the cost when a customer is unable to repay, which is why lenders often do reduce borrowing rates. Both the lending industry and consumers will have to pay for their mistakes, and it is best for the government to move aside to allow for private negotiation.

Credit card lending is a risky business:

Why are interest rates on credit cards so much higher than the rates for home or automobile loans? Are these types of lenders greedier? One could think the answer to the latter question is yes after hearing all of the talk on Capitol Hill. The truth is interest rates on credit cards are higher due to the fact that money is being loaned to consumers with NO COLLETERAL. When people buy a home, the bank can repossess the house if the borrower is unable to repay – the house is collateral. The same holds true for automobiles. However, when banks issue credit cards to consumers, the bank has no recourse if the borrower is unable to repay. Therefore, interest rates are determined by RISK factor and overall demand for credit.


It is most unfortunate that politicians have focused on the fact that they do not wish to appear insensitive to people struggling to pay their bills with the hope that voters will remember this bill when it comes time for the 2010 elections. Even more disturbing is the Republican Party, a supposed “conservative alternative,” voting for a measure that expands the powers of the federal government. Chairman Michael Steele need not look any further than this bill to see why less than 25 percent of voters identify themselves as members of the Grand Old Party.(2) Eight years of George Bush’s big government fiscal liberalism has done considerable damage to the party’s reputation. If the Republican Party has any chance of growing in size, it must take itself off the path of the last eight years and become the party that stands for small government, individualism, freedom, self-responsibility and put practicality ahead of populism.


(1) http://news.yahoo.com/s/ap/20090519/ap_on_go_co/us_congress_credit_cards

(2) http://thehill.com/leading-the-news/fewer-than-one-in-four-identify-as-republican-2009-04-29.html