When banks try to defend credit cards

By Felix Salmon
May 12, 2009

With the credit card bill finally coming in to focus, the banks’ complaints are ringing increasingly hollow:

“ABA is very concerned about the direction this legislation is headed and we are concerned over the impact it will have on the ability of consumers, students and small businesses to get credit cards,” said Ken Clayton, senior vice president of card policy at the American Bankers Association. “As we have said repeatedly, it is vitally important for policymakers to get the right balance of better consumer protection while not jeopardizing access to credit and the credit markets. We are very worried that the Senate bill fails to achieve this balance, to the detriment of American consumers.”

For one thing, the new bill isn’t all that different to new regulations imposed by the Federal Reserve which were due to take effect in July 2010; this just moves those regulations up a few months, probably to February. Other than that, the differences are minor: no one, at the margin, is going to fail to get a new credit card just because the terms and conditions have to be transparently posted online.

But in any event, “the ability of consumers, students and small businesses to get credit cards” simply isn’t a problem right now — and it’s very unlikely to be a problem at any time in the foreseeable future. If the average number of credit cards per American comes down, that’s no bad thing — and if, at the margin, a few people find themselves unable to get a credit card in future, that’s probably because they are so uncreditworthy that they really shouldn’t have one in the first place. Much better that they go to their local credit union and get a checking account with a debit card and an overdraft facility, or an outright personal loan.

I know that lobbying organizations have to do their very best to protect their members’ interests, but I do wish that sometimes the press wouldn’t simply parrot their statements with a straight face. At least in this case it’s obvious to the overwhelming majority of newspaper readers that the interests of the banks and their borrowers aren’t nearly as aligned as the ABA would have them believe: the more interest that banks charge, the more money they make, and the less money that consumers have left over.

But I think my favorite argument in favor of the banks comes not from the ABA but from Tom Brown, reliable shill for banking interests everywhere:

If you compare what the card industry looked like 20 years ago to how it looks today, you’ll be astonished at how much better a deal consumers are lately getting. And government regulation isn’t what drove the improvement; free-market innovation and competition, did. Twenty years ago, all consumers paid the same interest rate—and it wasn’t low (19.8%).

Um, Tom. For one thing, consumers ran much lower balances 20 years ago. And for another thing, interest rates generally were a good 10 percentage points higher, 20 years ago, than they are today. Comparing nominal rates, rather than spreads, is rather disingenuous.

The weird thing is that this credit card bill is mainly political theater anyway, thanks to those Fed regulations which are going to come into force anyway. It makes the president look good, but it’ll change very little in practice. So one really does wonder what all the fuss is about.

Update: Joe B emails:

Not only was the spread lower 20 years ago, as you so smartly point out, so were nominal rate. I have credit card bills from 20 years ago. The rate was about 12-15 percent on the cards I had. It was the scandalous cards at 19.8. Moreover, there was no such thing 20 years ago as a default rate or companies raising your rate based on your other relationships with the bank. The grace period was also 30 days, compared to 20 today. The junk fees (late, over-the-limit, forex) were lower. And consumers were NOT paying the same rate. There was a wonderful diversity of card issuers and rates (almost all fixed) available.


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If they can’t get a credit card, will they go to a pay loan company, not if the government can “fix” that too.

What does that leave them? Go without or a loan shark.

I am sure that is better than alternative.

Maybe the government should stop trying to save irresponsible people (banks, car makers, etc.) at the expense of responsible people.

Posted by Marc | Report as abusive

Loan shark practices hurt everybody, not just “irresponsible people.”

Posted by joyce stillman | Report as abusive

Marc: The biggest “loan sharks” out there are the predatory big banks behind these unscrupulous credit card practices that are designed to rip off consumers. Oh, and in case you forgot, these are the same big banks that we the tax payers recently bailed out to the tune of several hundred billion dollars!

Posted by Credit Crooks | Report as abusive

Two points: the government shouldn’t be trying to influence who gets credit and who doesn’t…that is up to the individuals seeking the credit and the people extending it (in this case, banks and credit card companies). Less credit cards may be a good thing, but it isn’t the place of the government to make that happen.

Also, you said “the more interest that banks charge, the more money they make, and the less money that consumers have left over.” This completely ignores COMPETITION. If your statement was true, then all credit card companies would charge astronomically high interest rates. Rates may be high, but companies have to compete for the most attractive rate possible, and that means LOWERING rates. True, banks want higher rates where they can get them, so there is an equilibrium between what consumers and banks are willing to accept. If rates are high it is because banks feel that the risk of lower rates is too high, or the return from lower rates isn’t enough to make it worth the bank’s while to extend credit.

Posted by Ryan | Report as abusive

Felix, you obviously dont know anything about my career history if you think i am a “reliable shill”. The facts are Felix that credit card interest rates in absolute and relative terms came down as a result of competition over the 20 years. If you are going to question someone’s facts you should know the right answer.

If you abuse your credit cards, then you get what you deserve, plus more!

We call need to be protected against some of the mean things that credit card companies pull on us.

Posted by Enlightenment | Report as abusive

Dear Marc,

when you say “Maybe the government should stop trying to save irresponsible people (banks, car makers, etc.) at the expense of responsible people” I think you are missing the point.

Banks assume almost NO RISK when they lend to irresponsible parties – the risk and cost is spread across responsible people through bankruptcy court proceedings.

Posted by Squeezie | Report as abusive

Most high interest credit cards are usually easy to get and really the interest rate only matters if you roll over your balances from month to month. People that have had bankruptcies, judgments or just have a bad credit rating, for what ever reason are the most common applicants for high interest credit cards.


Posted by william | Report as abusive