Is there any business in the United States more vilified than credit card lending?
The card companies stand accused by Congress and the Federal Reserve of gouging customers with impenetrable fees, enticing innocents to borrow themselves into bankruptcy, and blowing off cardholders who try to correct errors in their accounts.
Attacking these firms is a crowd-pleasing sport for lawmakers, in part because every constituent has a story about being mulcted by a card issuer. Last week the House of Representatives easily passed a credit card holders’ bill of rights. The Senate will take up a similar measure soon. President Obama has signaled his approval.
Someone has to stand up for these companies. I guess it'll have to be me.
Before I try to inject some perspective into the debate about card issuers, I'll stipulate that they've been guilty of genuinely sleazy behavior -- much of which is properly targeted by the measures in Washington.
They shouldn't be allowed to jack up the interest rate on card balances retroactively, except in rare cases. They should apply your payments to balances with the highest rates first. They shouldn't accept charges that put you over your credit limit and trigger a fee, if you request such a hard cap.
And they should be barred from marketing directly to young persons. Cards used to be hard to get if you had no credit history. But I could wallpaper my house with the come-ons that now come addressed to my college-age kids, a practice the banks must have learned from cigarette companies handing out free smokes at rock concerts.
But we routinely berate card issuers for actions that are actually prudent and wise. Certain purported sins, such as raising rates and cutting credit limits for some borrowers, merely ratchet back the loose standards that helped lead us to economic perdition. For years we cursed the banks for showering Americans with easy credit. Now we curse them for tightening up.
Because of their unsavory past, the issuers are unable to make this case for themselves. They remind me of some frat guys at my college who were guilty of only about half the things they were accused of, but what was true was bad enough. From them I learned this tenet of the court of public opinion: Once you've been caught firing guns at African American students from the frat house roof, no one will believe you're innocent of anything.
Still, it's proper to take an unemotional look at the rest of the prosecution brief against credit card companies.
One frequent complaint is that issuers arbitrarily jack up interest rates and slash credit limits even on customers with pristine records. Given the straitened means of many families in these tough times (the argument goes), that's like snatching away a lifeline when it's most needed.
"That's pretty nasty," says John Ulzheimer of credit.com, who appears ubiquitously on personal finance shows. The higher rates "make it harder for people to afford their existing balances," he says, and the lower limits can damage cardholders' credit scores, which get marked down when their balances come too close to their limits.
The real scandal, according to the common refrain, is that issuers such as American Express, Citigroup and Bank of America have received billions of bailout dollars from taxpayers. How dare they repay the favor by putting the squeeze on us?
This is where populism shades into demagoguery. Critics who argue that it's inappropriate for bailed-out banks to tighten credit terms on taxpayers have it exactly wrong: If we're footing the bill, we should praise these banks for being stingy with credit, not hammer them for it. It won't be any easier for them to pay us back if we hector them into maintaining the loose standards that produced this mess.
According to the latest data from Fitch Ratings, late payments on credit cards reached a record in February, with delinquencies close behind. The sad fact is that rising unemployment produces credit stress. Under the circumstances, tightening credit standards seems like a judicious precaution.
What about the claim that the issuers are perversely cutting limits for their highest-scoring, or safest, customers? It's true but misleading. Fair Isaac Corp., which invented the FICO score, found that of the 16% of consumers whose limits were cut between last April and October, two-thirds weren't guilty of any late payment or other "risk trigger."
Most of the reductions were applied to inactive or rarely utilized cards. This makes sense, because banks have to keep a reserve against the full amount of cardholders' credit limits. Why tie up capital for credit that isn't being used?
Fair Isaac says such reductions seldom produce real constraints on the consumers -- or any significant lowering of their scores. The computers and humans implementing these reductions aren't perfect, so many holders will undoubtedly feel they've been treated unjustly. (I imagine I'll hear from a few.) But the study suggests that most of the cutbacks are defensible.
Another sin laid to the card companies is charging sky-high interest rates. We know one reason for this: A 1978 Supreme Court decision enabled issuers to stick the highest rate permitted in their home states down the throats of customers nationwide -- that's why banks locate their credit card arms in jerkwater states without usury limits, like South Dakota.
But what's a "reasonable" annual rate? Who's to say that 25% is out of line for an uncollateralized balance owed by, say, someone holding six maxed-out Visa cards? (There's a customer for whom credit should not be cheap.) The banks are surely serious when they say that a federal rate cap, if set too low, would result in more Americans being refused any credit at
all.
In considering the card issuers' behavior, we need to focus on and fix what they really do wrong. Make them comply with clearly written customer contracts, yes. Make them offer cheap and copious credit to all just because their past mistakes have led to a taxpayer bailout, no.
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