Thursday, May 21, 2009

Congress the shepherd: pity the sheep

The president will sign a bill into law this week that will essentially end some unfair credit practices lenders have initiated over the years which many consumers had no protection against. These practices include interest rates going sky-high overnight and virtually without notice because a customer is late with a payment (even just once) or exceeds the credit limit which, incidentally, is not likely to happen except when one is charged extra fees for late payments. These fees are added to the total balance and if that balance exceeds the credit limit, one is then hammered not only for the late payment but is now also on the hook for a “exceeding the credit limit” penalty. It is all, of course, in the fine print.

The horror stories are many, and credit card companies are the bad guys. Never mind that Americans voluntarily signed up for such practices but never bothered to read the fine print. What they got was a credit card that enabled them to buy stuff they could not previously afford. Well, guess what? It turns out they couldn’t afford the stuff after all! Believe me; I know of which I speak because “they” was “me” and thousands of other consumers who lacked the patience, the diligence, and the discipline required to save for such purchases. And it is not incidental that money saved is money loaned and money earned on these loans. Win-Win, as they say. Wiser consumers understand that if one cannot afford to put aside a little money each week or each month to save, it is highly unlikely that one can afford a new monthly payment obligation. Elementary, we shudda thunk.

Now US Senator Mark Pryor, D-AR, is going to hold hearings this summer to monitor the credit card industry’s response to this legislation. The industry is certainly going to have to make some adjustments, to be sure, because there will likely be certain losses associated with this congressional clamp. In this regard, Congress did the right thing. Sad, still, that the American consumer needs be protected from himself. What Sen. Pryor is expecting to discover is that credit card issuers will likely tighten requirements for qualification, might re-implement annual fees just for the privilege of having the credit card and may even charge interest from day one after a credit purchase is made. And “that right there”, said Sen. Pryor, “is the problem with the credit card industry …” (Arkansas Democrat-Gazette, 5/21/09, pg 8a).

Sorry, Mr. Pryor, but “that right there” is not the problem. It was not that many years ago when it was not so easy to obtain a credit card. It was not that many years ago when all users paid an annual fee. And it still is that if one takes out a short-term loan from a bank, interest is charged on the loan in addition to other fees originating from day one. Once the bank cuts the check, the borrower is on the hook for the amount borrowed in addition to the fees and interest. It is how lenders make money, it is how the credit markets work, and there is nothing unfair about any of it. So what is “punitive” about a credit card issuer doing the same? If a purchase is made on a credit card, it is essentially borrowed money; no one I know of gets “free” loans. Credit costs money although judging by what this government spends, regardless of incoming revenue, Congress may not actually know this.

The worst idea to ever invade this country is revolving credit accounts. Those who were able to sell more stuff on these types of credit accounts likely believed them to be a boon to the economy and to their bottom line. They were moving more merchandise and making money hand-over-fist. Consumers could suddenly “afford” to purchase more and more … until the bills came due and the compounded interest on these revolving accounts in addition to the “other” purchases made because there was still “available credit” left on the card made the debt virtually impossible to pay off. And here we are today.

Few would dare to argue that any business practice must be above board, and any loan contract must contain all necessary information relevant to charges and the repayment of the loan. And credit cards themselves are not such a bad idea, but revolving accounts should be eliminated entirely because it is clear these types of accounts cannot be managed because these types of accounts never seem to go away. These are perpetual debts that make money on top of money month after month … with no end in sight except for those who can make payments larger than the required minimum. There is nothing good that can come from these types of accounts even if it is that stores may not move merchandise at previous levels when consumers were spending money they did not have for crap they did not need and could not save up for in the first place.

Whether Congress can actually protect the American consumer from his own stupidity and naiveté remains to be seen, but it does not mean they will not try. And in the end, what we could not previously afford will end up costing much more than anyone could ever have anticipated.

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