TJP

It is Time for Congress to Restrict Credit Card Interest Rates

By Byron A. Ellis, March 25, 2008

Interest rates on credit cards vary widely, they can be as low as 0% introductory rate to as high as 36% in the United States. High rates are a windfall for credit card issuers. Credit cards issuers generate revenues through interest rates, fees, and penalties charged to credit card users.

A credit card issuer is, generally, a bank that gives the cardholder an account number that can be use with merchants that accept the card; the cardholder can also use the card to borrow money from the bank.

Credit card issuers can raise cardholders’ interest rates even if payments are on time. Frontline noted that this practice is called the “universal default” clause and it is increasingly becoming the standard clause in credit cards agreements.

According to Frontline, there is no limit on the amount a credit card issuer can charge the cardholder for being even an hour late with a payment. They noted that the U.S. Supreme Court made that possible in 1996 in Smiley vs. Citibank, where it lifted existing restrictions on late payments.

Gerri Willis noted that on December 05, 2007, members of a U.S. Senate subcommittee found that some credit card companies automatically increased cardholder interest rate even when they were current on their payments. She indicated that in one case a credit car issuer increased interest rate from 8% to 23% because of a drop in FICO credit score. BusinessWeek reported that Bank of America jacked up rates on cardholders who were not behind on payments. And, Capital One raised its cash advance fee for new customers from 19 to 23%.

It is important to shed light on credit card gauging, because it is similar to the sub prime debacle. Moreover, if the government (The Administration, Congress, and the Federal Reserve) wants to generate consumer spending, which is the engine of the economy, they should ensure that credit card interest rates, fees and penalties charged by banks to consumers are low.

The Federal Reserve reduced interest rates to banks in an effort to spur investment. It did not, however, engineer interest rates reduction for credit cards.

Nancy Trejos of the Washington Post noted that the dramatic cut in interest rates by the Federal Reserve have had no effect on credit card interest rates and some credit card rates have increased.

Consumers use credit cards to make most of their purchases. Therefore, if credit cards interest rates are high they will refrain from using credit cards. Consumer purchases are 60% of the gross domestic product. Such lack of foresight by the government indicates a lack of understanding of consumer behavior.

Some states, and countries, have usury laws. Usury is charging a price for credit that exceeds the limit set by law. However, these state laws often do not protect the consumers. There are about 26 states that have no limit on what bank credit card issuers can charge in interest rates. Some researchers, such as Bowsher, however, have argued that usury laws are harmful when effective.

Biblical references to usury are found throughout the Old and New Testament. For instance, in Exodus 22:24, we are told “If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest” and in Luke 6:35, “But love your enemies, do good to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be sons of the Most High, because he is kind to the ungrateful and wicked.”

It is time for Congress to stop banks for stealing from the American consumers. Congress should regulate credit card fees and penalties, and interest rates should be tied to rates set by the Federal Reserve at not to whim of the banks.

SAVE DARFUR

Free Tibet Campaign