President Obama's push to correct the abuses of the credit-card industry will have one inevitable effect: Fewer people will carry plastic.
This won't hit the wealthy or most of the people who pay their credit-card bill in full each month. It will affect poor people – and those at risk of falling into poverty – who use the cards as an easy way to borrow.
The trend is already under way. If credit-card companies aren't slashing the credit limits of their customers, they're closing their accounts or charging big fees. (Click here to see how even the financial crisis is pushing up rates.)
But with losses still rising and Congress on the verge of capping fees and delaying interest rate hikes, those companies aren't keen to take on big new risks. And if companies can't charge highly indebted people ridiculously high fees to make up for those risks, then business logic would suggests the companies aren't likely to keep them on as customers.
The intriguing question is: Is that bad or good?
For decades, the argument against regulating high credit-card fees was that it would force poor people to use even more expensive forms of credit, such as payday loans.
But that reasoning is oversimplified, at best, according to a study [pdf] this year by Angela Littwin , a law professor at the University of Texas at Austin. When she interviewed poor people, she found that some two-thirds of them said credit cards “tempted” them to spend more. Plus, when faced with the prospect of having no credit card, they offered several alternatives, including the ability to set their own credit limits so they wouldn't overspend.
Bill of rights
That is precisely one of the provisions of the "Credit Cardholders’ Bill of Rights" legislation now before the US House. The bill also prevents companies from forcing cardholders to pay off their low-cost debt before their high-cost debt – a point of great frustration for some of our readers like Andy (click here for his comment). The House bill would apportion payments to the debt instead. (See a summary of the bill here.)
Perhaps the bill would narrow the yawning gap in the current business model where high-income people get no-fee reward cards with low interest rates while indebted low-income folks are stuck with high-fee, high-interest cards that can make life even more difficult.
"We think it's been out of balance," President Obama said Thursday of the industry, after meeting with credit-card company executives. "We think we need to create a new equilibrium."
That equilibrium, however, could also mean higher fees and interest rates for middle- and high-income cardholders.