While President Obama met with executives from the leading credit card companies yesterday two senators have called on the Federal Reserve to immediately implement an emergency freeze on interest rates tied to existing balances on credit cards.
The Federal Reserve plans to put a new set of rules in effect for credit card lending beginning July 2010 but that’s an entire year from now.
In the meantime Senators Chris Dodd (D-CT) and Chuck Schumer (D-NY) wrote a letter to the Federal Reserve Chairman Ben Bernanke and other regulators saying that companies are increasing interest rates now before the new rules go into effect so Americans need help now.
“Consumers describe situations to our offices in which the interest rates on their accounts have doubled or tripled overnight, without any misconduct on their part,” the letter says. “This kind of practice clearly violates the spirit and intention of the rules, even if the delayed implementation date has the effect of making such behavior legal.”
Congress is currently developing legislation that will rearrange and organize the Fed’s new rules but they still have a way to go.
After meeting with 14 executives from companies like Bank of America, Wells Fargo and Visa, President Obama said that his administration would work with Congress to evaluate proposals for reform.
“We’re at a time where issues of credit and how businesses and families are able to finance everything from a car loan to a student loan to just paying their bills every day is on a lot of people’s minds,” President Obama said. “We want to preserve the credit card market, but we also want to do so in a way that eliminates some of the abuses and some of the problems that a lot of people are familiar with.”
The card executives at agreed to work with the Obama administration to address the President’s concerns according to the American Bankers Association, and are currently working to implement the Federal Reserves’ new rules.
Some took exception, “The Federal Reserve itself has indicated these rules are likely to shrink credit availability and result in increased rates for some consumers,” ABA President Edward Yingling said in a statement. “The goal of any additional efforts should be to achieve the right balance between enhancing consumer protections and ensuring that credit remains available to consumers and small businesses at a reasonable cost.”
There is also concern by some that President Obama’s push to correct the abuses of the credit-card industry will have one inevitable effect — fewer people will carry plastic.
Of course this won’t affect the wealthy or most of the people who pay their credit-card bill in full each month. It will affect people who use the cards as an easy way to borrow.
But with losses still rising and Congress on the verge of capping fees and delaying interest rate hikes, those credit card companies aren’t enthusiastic about taking on new risks. If these credit card companies can’t charge highly indebted people ridiculously high fees to make up for those risks, then maybe the companies won’t keep them on as customers.
But, would this be a good or bad thing?
The argument against regulating high credit-card fees for decades has been that it would force poor people to use even more expensive forms of credit — such as payday loans.
But studies also show that poor people say that having credit cards “tempted” them to spend more. Plus, when faced with the prospect of having no credit card, they offered several alternatives, including the ability to set their own credit limits so they wouldn’t overspend.