The UWIRE Forum


From youth perspective, credit card bill a suitable start to reform
May 31, 2009, 1:57 pm
Filed under: Uncategorized
Michael Warren

Michael Warren

Just as a broken clock is correct twice a day, populist politics sometimes get it right.

Take one of the latest initiatives taken up by Barack Obama: credit card reform. Both the House and Senate chambers passed similar versions of the Credit Cardholders’ Bill of Rights Act, and President Obama is pushing for the legislation to be resolved quickly so he can sign it before Memorial Day.

Obama spoke about the problem credit card companies pose to unwitting customers in one of his recent weekly addresses.

“You shouldn’t have to fear that any new credit card is going to come with strings attached, nor should you need a magnifying glass and a reference book to read a credit card application. And the abuses in our credit card industry have only multiplied in the midst of this recession, when Americans can least afford to bear an extra burden,” the president said on May 9, according to the Associated Press.

It’s a populist battle for the ages, pitting the big bad corporations against the little consumer, and the president has no qualms bringing class into the picture.

“We need a durable and successful flow of credit in our economy, but we can’t tolerate profits that depend upon misleading working families. Those days are over,” Obama said.

Despite the politics being played, the regulations are a good idea, even if this federalist would rather have such matters decided in the state houses rather than in the Capitol. Current loopholes in the Truth in Lending Act can allow creditors to misinform or fail to inform cardholders of changes to their annual percentage rate of interest. This sort of abuse of the system leaves many customers, including young people, in the terrible position of having extremely high interest rates that create years of debt and poor credit.

Think of the banks and lenders that descend on campus at the beginning of every school year. These creditors often use the pretense of college students’ newfound freedom as a way to convince students to open an account on their own. Without the knowledge of how to properly manage credit card balances, some students can fall into a vicious circle of perpetual debt when those creditors that seemed so nice in person start jacking up rates unannounced.

The bill currently in Congress seeks to remedy this problem by banning retroactive rate hikes, a tactic whereby creditors raise APRs on past purchases. The legislation also calls for a 45-day waiting period before lenders can raise rates and dictates that companies must maintain promotional rates (those low rates credit cards use to sell themselves on TV or in mailers) for at least six months. Additionally, creditors must agree in advance with the cardholder before approving transactions that would exceed a credit limit.

Most of these new regulations seem smartly preventive and beneficial for young people. Some, like the six-month moratorium on raising promotional rates, are a bit too restrictive, particularly since they come from the federal government. There is also some uncertainty about the effectiveness of some provisions. David C. John of the Heritage Foundation is concerned that the aforementioned provision requiring cardholder approval before extra-limit transactions could effectively lower credit limits for middle- and working-class families.

“As the individual approaches his or her credit limit, the credit card company is likely to refuse to approve new transactions until it is certain that there are none in the pipeline that could push the customer over the limit,” John wrote last week.

Most interesting, however, are the bill’s restrictions on credit card issuances to young people. Section 7 of the current bill prohibits issuing credit to people under the age of 18 and places limits on the amount of credit that can be issued to so-called “full-time, traditional-aged college students.” The age limit is reasonable and smart, leaving open the options for parents to open accounts so long as they are designated the primary cardholder. No matter the level of maturity, most people under 18 simply do not have the experience or knowledge of how to maintain a line of credit properly by themselves, which makes them easy prey for creditors.

Where the age regulations get a bit stickier is with those limiting college-aged people. Thinking of putting those big payments, like Spring Break or a new computer, on your credit card? Think again. Congress would have maximum credit limits for students either 20% of annual income or $500. The intention behind the regulations is good enough since college students, like minors, are frequent targets of abusive creditors, but the limits seem a bit, well, too limiting. The limit may be proper for a beginner with no credit, but the options are limited for older, more experienced college students who may have legitimate needs for credit beyond these somewhat restricting levels.

Of course, these problems can arise when the federal government tries to solve problems that should be left up to state governments. The president and Congress may have too broad a brush to deal with some of the nuanced faults of this bill. But for a problem that needs addressing, it’s a suitable start.

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