05.29.09
By John Ulzheimer
Now that the
CARD Act has been signed into law, we begin the slow march towards enforceable law, which begins in February 2010. And while many of us are thankful for the consumer protections of the law like longer grace periods, no more universal default, and more notice of changes in terms and protections for the most inexperienced credit users, I think we all should be thankful for what’s missing... a cap on interest rates.
You might think that I’d support capping interest rates at, say, 18 percent, but you’d be incorrect. Capping rates would have a drastic – and likely very unfortunate – impact on some, and absolutely no impact on others. Follow my logic for both groups:
Drastic Impact – High-risk borrowers do not deserve to pay low or even moderately low interest rates. They have not earned that luxury. What they’ve earned with poor credit management practices is to subsidize the increased risk taken on by mainstream lenders. It’s like giving someone who has had multiple DUIs the same auto insurance premium as someone who has a perfect driving record. In fact, capping interest rates could prove disastrous for high-risk borrowers, and mainstream lenders would likely avoid that segment of the population altogether. It also might lead to more unemployed and out-of-business lenders who happened to focus on the high-risk segment. The key goal for high-risk borrowers is to make themselves, through responsible credit management, be treated like low-risk borrowers, and thus earn their way to better rates.
No Impact – There is a segment of the population who is watching this Credit Card legislation half-heartedly, because these people are immune one no matter what happens. That population is the one without credit card debt or with controllable
credit card debt. Rates don’t matter to them because they don’t revolve balances from one month to the next. And they don’t miss payments, so grace periods, minimum payment requirements, and clearer notices about changes to terms and conditions aren’t important to them either. Capping rates at 18 percent would do nothing for them because rates at 500 percent are just as irrelevant as those at 18 percent.
I believe the call to freeze rates was a publicity stunt and not valuable to the cause of many who wanted reasonable changes, which is what we already got with these new laws that will begin to take effect very soon.
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