Should Government Regulate Credit Card Terms

Should the government implement new regulations on the credit card industry? 

There is a credit limit crisis currently sweeping across the country and it has taken on viral characteristics.  Card holders are discovering that they no longer have the credit limits they once did.  What makes this even more disturbing is they are most often learning this when the open their statements.  In other words it is coming as a surprise.

Aside from the immediate impact of having less credit available, that one action by one card could trigger the same action from all the holder’s cards.  By reducing the credit limit, they have increased the credit usage to credit availability ratio which is grounds for other cards to follow suit.

In a Roper Poll, 78% of the interviewees said that nobody really reads the terms and conditions.  According to Chi Chi Wu, an attorney at the National Consumer Law Center, it wouldn’t make any difference if people read the terms as they are so complex that it would require special training (law degree?) to interpret them accurately.

Therein lays the basic dislike of credit card companies.  Their business model is simply unfair and that grates most Americans and that’s what should lead for a call for reform.

Americans are accustomed to a simpler, more transparent, financial deal.  When you rent a house you know what the rent is and for how long.  When you buy a car you know what the payments are and for how long.  When you get cable you know what the monthly rate is and at least have a general notion how long it will stay at that rate.  The same goes for telephone and internet service.

If you actually did read the terms of your credit card you’d ask yourself who in their right mind would do this deal.  The terms are so insidious as not to be believed.  However, Chase, Bank of America, Wells Fargo (remember that TARP money we gave them) decided it was in their best interest to essentially get out of the credit card business by drastically cutting limits and then jacking interest rates.  Essentially they have reduced their liability exposure while doubling their earnings by the increased finance charges.  These three are not the only ones but they are the ones who got the most press regarding our bailout money.

Meanwhile in Congress, the only bill that is alive, although nobody thinks it will pass, addresses the amount of time a card issuer must give a holder to notify them of any change in the terms.  It increases the notification from 30 to 45 days.

What world is Congress living in?  First of all, nobody reads the notifications because they are (or used to be) lost in a swamp of junk mail credit card offers.  But assuming for a moment that you did read it, what is the average consumer supposed to do.  The smartest thing you can do if you can afford it, is opt out and pay off the bill at your current rates.  This however reduces the amount of credit available and if you can’t replace it with a new card, it will impact your usage ratio.

What has to happen is the contract between the issuer and the card holder has to resemble the same fairness that we expect with our other financial dealings.  Contracts should be for fixed terms over a fixed period of time.  Obviously if a card holder violates the terms by going over limit or missing a payment, the issuer should have the right to penalize.  But if the card holder lives up to the terms then the issuer cannot change them in mid-stream.

With over 6 million Americans drawing unemployment and credit cards now being used to pay off medical expense and food, many Americans are going to be faced with a real crisis if this resource disappears.