Credit Card Crackdown Could Hurt Lending

Published July 1, 2009

Credit card companies have been raising interest rates, fees, and penalties and reducing credit lines, angering consumers and federal lawmakers alike.

But industry experts and economists warn the Obama administration’s recent jawboning of credit card company executives and pressure for restrictions on credit card lenders could hurt consumers instead of helping.

“If government limits what credit card issuers can charge, that is a variety of price control. To discover the likely consequence, start by asking what are the likely consequences of price control? The answer is shortages,” said Terry Coxon, an economist and senior analyst at Casey Research, a private economic research and analysis firm.

“There will be fewer credit cards, credit lines will be smaller, some people will be frozen out, and a certain amount of spending won’t occur because of the tighter credit,” Coxon said.

President Backs Restrictions

President Barack Obama complained about credit card practices in a meeting with more than a dozen card company executives in April and expressed support for legislation to end interest rate hikes on existing balances and confusing credit agreement language, among other things.

Several versions of credit card legislation are pending in the House and Senate.

“I trust that those in the industry who want to act responsibly will engage with us in a constructive fashion, and that we’re going to get this done in short order,” Obama said after the meeting.

The Federal Reserve has issued rules that include restrictions on interest rate hikes on existing card balances and on using payment histories on other loans, such as auto loans, to price credit cards. Those measures are scheduled to take effect in July 2010.

Industry Watcher Likes Reforms

Bill Hardekopf, chief executive of, said he favors many of the proposed reforms and expects legislative action before July 2010. is a free consumer resource Web site that provides information on more than 1,000 credit cards.

“When you have the Federal Reserve, the House, the Senate, and the President all singing from the same song sheet, you’re going to have something happen,” Hardekopf said. “So many things in these reforms are reasonable. The [American] Banking Association disagrees because they won’t make as much money in late fees. They won’t be able to raise rates as easily.”

Hardekopf said card issuers are raising interest rates, imposing more penalties, and cutting credit lines because “banks are hurting. They’re looking to make up what they’ve lost” as a result of defaults, late payments, and fraud.

Card Issuers Need Adjustments

John Berlau, director of the Competitive Enterprise Institute’s Center for Investors, said the adjustments the card issuers are making are needed and government efforts to stop them will hurt consumers.

“Limits on risk-based pricing, as enacted in rules last year from the Federal Reserve and in proposals in Congress that go beyond these rules, could result in sharp limits on the availability of credit at a time when policymakers want to get credit flowing again,” Berlau said.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.