Credit Card Compromise Considered by Congress

It seems that there has been some movement on the reform of credit card practices in the past week. It no doubt has a long way to go, but it’s an encouraging sign after much of President Obama’s first 100 days in office was spent on other issues. To recap:

On Saturday in his weekly radio / internet address, President Obama demanded that Congress send him credit card reform legislation to sign by Memorial Day. I was a bit disappointed when I first heard about Obama’s call to action. I know it may be idealistic, but I expect the President to present a bill to Congress to pass on an issue as important as credit card reform. Sure, he’s got some “talking points” out there on the subject, but I don’t consider that leadership. To compound his lack of a plan, a timetable for action of under thirty days seemed to be setting himself up for another demonstration of his lack of real political capital (isn’t that bankruptcy cramdown bill still floating around somewhere?). I might be a little bit more forgiving of Obama’s demand without a plan if the House of Representatives hadn’t already demonstrated that the best that 400+ of our elected officials could do on the issue of credit cards was pass a measure to implement the Federal Reserve’s coming regulations a bit sooner than would have otherwise happened.

Now, there’s been a flurry of news reports about a compromise between Senator Christopher Dodd and Senator Richard Shelby that would have our new credit card law, as I understand it, ban interest rate hikes on existing credit card balances unless the cardholder was more than 60 days past due. At that point, the interest rate on the balance of the debt could be retroactively increased. However, if the consumer made 6 consecutive on time monthly payments, the credit card company would be required to lower the interest rate back to the pre-penalty rate.

In theory, I like it. I just worry that (a) it won’t be enough and it will sap the momentum for credit card and debt reform; or (b) it will be like the Sarbanes-Oxley Act, and impose a lot of cost onto the system without making credit any more affordable.

Why do I worry that it won’t be enough? It doesn’t do anything to lower rates on current credit card debt. If you’ve been suffering through a high interest rate because you missed a payment and the interest rate on your existing balance got raised, will you be able to have it lowered under the plan? Or will you have to still call the credit card company on your knees and grovel (that’s “ask for a lower rate” in newspaper columnist debt-advice-speak)? Or will you have to find a lender that will be willing to allow you to transfer your debt to a new card to take advantage of the rules?

Why do I worry that it will be like the SOX? Because the aim of Sarbanes-Oxley was to increase corporate transparency and improve accounting after Enron and other corporate financial scandals, yet less than a decade later we’ve discovered that our financial institutions were in pretty severe trouble and only a select few (who shorted the stocks and made a fortune) believed that they were insolvent until (in some cases days) before they had to reveal that it was true. If the banks find another way to charge cardholders outrageous fees in order to secure their profits ($100 late fees anyone?), then the bill will only have put the monster to rest for a little while.

That’s not to say that I’m opposed to the compromise. I like the idea but I’d like to see more details about how the bill is going to tie everything together. The credit card lobby is strong, and I’d like to see the loose ends tied up while there’s some momentum for it in government.

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