Co-blogger Vance Ginn has nicely laid out some of the perverse, probably unintended, but definitely foreseeable, consequences of the federal government’s proposed $8 cap on the amount that credit card companies are allowed to charge credit card holders when they are late on a payment.
I want to point out two other consequences, both of which are perverse but one of which is especially perverse.
First, though, my personal story. Every once in a while, while I’m traveling or particularly busy, I’ve let slip a payment date and paid a credit card balance late. It happened only a couple of times because the credit card company taught me virtue with a $30 to $35 late fee. Ouch! I got very careful.
Now to my point about consequences. If the regulation is implemented, then, as Vance points out, credit card companies will adjust. He names a few adjustments.
One that he doesn’t mention is that they will, to the extent that can do it, try to figure out ways of charging more to people who are late. It might be by upping their interest rate once they’ve recorded x number of late payments over y number of months. It might be other adjustments that we don’t know but that some of the credit card companies’ best minds will think hard about.
What that approach has going for it is that it targets the higher charges to those who are causing the problem. These other approaches they might take are presumably less efficient than high late charges, or else they already would have been taking them.
But what if the credit card companies can’t figure out how to target the higher charges to those creating the problem? That’s when we get the kinds of adjustments Vance talks about, such as higher interest rates on everyone. This is particularly perverse because it causes people who were not creating the problem to pay more.
One other point that doesn’t relate to credit card fees but does relate to usury laws.
Shortly after I moved to the United States, in the fall of 1972, I applied for a Visa credit card with a credit limit of–are you ready?–$250. That was the lowest amount you could apply for. I was turned down. My guess is that the reasons were twofold: (1) I was not a permanent U.S. resident, so the company might have feared having trouble collecting if I didn’t pay and moved back to Canada; and (2) I had no credit history–no car loans, no any kind of loans.
I thought that living in the United States longer would help. So in 1974, I applied for a Mastercard with a limit of $400, the lowest that Mastercard granted. I was turned down.
By 1975, I finally got a credit card. I think I know the reason: the change in usury laws. When credit card companies gave out cards in a state, they were under the usury laws of that state. If I recall correctly, the limit on interest rates in California at the time was 11%. That wouldn’t be a good rate, from a credit card company’s viewpoint, for an unknown risk who could easily leave the United States. But a federal court decision around 1975 established that credit card companies could charge an interest rate consistent with the usury laws of the state in which the credit company located. So a number of them located in South Dakota and other states that had no limits on interest rates. I finally got a card with a high interest rate. And I rarely had to pay it because I made it a point, except in extreme circumstances, to pay the full balance down each month.
We often hear about the absurdly high interest rates that credit card companies charge to young people with no credit history. But they’re simply adjusting for risk. I would have rather had a credit card charging 24% interest in 1972 than no card in 1972.
