Credit card crackdown to benefit consumers
New legislation in the U.S. and Canada could tighten consumer credit
This week it became official: personal credit is no longer a privilege reserved for those who manage their personal finances prudently and work hard to pay what they owe. Personal credit has become an inalienable right.
New U.S. legislation will give credit card companies nine months to make some significant changes to the way they deal with consumers.
They'll have to post their credit card agreements on the Internet, let customers pay their bills online or by phone for free and give people 45 days notice and an explanation before interest rates on cards are increased.
Furthermore, a cardholder would have to be more than 60 days behind on a payment before seeing the rate on an existing balance increase. Even then, the credit card company would be required to restore the previous, lower rate after six months if the consumer pays the minimum balance on time.
American politicians aren't the only one who are rushing to respond to a grassroots backlash against financial institutions: Canadian Finance Minister Jim Flaherty is expected to announce reformed rules for credit card issuers before the end of the month.
He has publicly expressed concern that while the Bank of Canada's has fixed the overnight lending rate at just one-quarter of one per cent - and vowed to keep it there for the next year - credit card rate charges don't reflect that.In the January budget document, the federal government warned that it would crack down on "business practices that are not beneficial to consumers." Among the suggested measures are a mandatory interest-free period of at least 21 days on new purchases, tighter rules on debt collection and plain-language for credit card agreements.
Not surprisingly, the institutions that issue credit cards are not happy about any of this. The head of American Express, Ken Chenault, has warned that limits on credit card fees may tighten the available credit to people who need it most.
In Canada, the Canadian Bankers Association (CBA) has been careful to differentiate between U.S. and Canadian regulations, stressing that Canadian consumers are already better protected by the disclosure required in monthly statements and in the 30-day notice period before rates change.
But the CBA also observes that credit card rates are so high because delinquencies are up sharply in these tough times and debt that's not secured by collateral always carries a premium cost.
In the end, however, it doesn't really matter what the business rationale may be for preserving the status quo. Credit has become an emotional issue - and therefore a political one.Politicians may perfectly understand the arguments of banks and other card issuers without exposure to parliamentary committees or lobbyists. But even more, they understand that voters have credit cards and they rely on them as a crucial part of their household capital structure - even if they should not.In a minority government situation, populist issues like fair access to credit for "the little guy" are quickly amplified and distorted. And anyone who knows the first thing about the power of social media grasps that a government's record is carefully tracked and much discussed in the blogosphere. And it doesn't take much to work people into a full-blown tizzy on certain hot-button issues.
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Anyone who doubts that, just has to look at the way that governments deal with gasoline prices and oil companies - which by the way, are significant contributors to government coffers.
Certainly in the U.S., members of Congress are unwilling to face voters in 2010 without being able to document the fact that they took a stand on an issue that touches so many households so directly.The best outcome from all the posturing and politics is if the banks are really right, and there is a consumer credit contraction as a result of the new sets of legislation. That's what should happen during a severe downturn. And that's what would happen if credit were a privilege and not a right.
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