God hates the sin but loves the sinner, we are told. Americans have a similar attitude towards credit cards. They love the cards but hate the card issuers.
Naturally, President Barack Obama has picked up on this sentiment and wants the credit card companies to be “fair.” Reports the Washington Post:
The Obama administration yesterday called for an end to unfair credit card industry practices such as retroactive interest rate increases for any reason, late-fee traps that penalize borrowers with weekend or middle-of-the-day deadlines and teaser rates that last less than six months.
In a written statement released by the Treasury Department, the administration outlined practices it would like Congress to reform as it considers two bills that would crack down on the industry. One proposal would force card companies to apply payments above the minimum amount to the highest interest rate debt. To crack down on over-limit fees, the administration would also like Congress to require card companies to get customers’ permission to set up accounts so transactions over the limit can still be processed.
There are lots of reasons to criticize the practices of credit card companies, but many of the rules are simply mechanisms to charge riskier borrowers more. If you pay off your bill every month, you don’t pay the extra fees and interest. If you are more disorganized, short on cash, or both, you pay more.
Higher charges make it possible to provide more credit to more people. Of course, politicians believe in the latter but not the former. Banks should provide credit cards, make loans, and issue mortgages to everyone, irrespective of credit standing, at rates akin to those charged Bill Gates. Anything more is viewed as a variant of “predatory” lending deserving condemnation.
Maybe it would be best for some people not to buy so much on credit, but that isn’t – at least so far – the government’s decision. However, it would be more honest if government branded people with the Scarlet C and banned them from borrowing than prohibiting companies from charging higher rates and fees to reflect higher credit risks.
The credit card debate is stranger than most in Washington. Listening to critics you’d think that the card companies were dragooning people off the streets, forcing them at gunpoint to sign up for cards, and demanding that they spend money else their children will be kidnapped and sold into slavery. Precisely who was forced to accept and use these terrible cards with their terrible terms? No one.
Instead of posturing as defenders of the body politic, crusading politicians should, as my friend Don Boudreaux of George Mason University suggested, give up their day jobs and start credit card companies. These entrepreneurs then could offer consumers better cards with less onerous terms, making everyone better off.