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The Card Act, or any consumer protection act, is always about tradeoffs.   You can make the rules more restrictive, but you have have to expect that the companies will try to make money in ways that you didn’t restrict.

Getting It Wrong About CARD

I recently came across this article about the CARD Act over at the Huffington Post.   In it, Tim Chen argues that “We Will All Have to Pay for Financial Reform”.    He argues against financial reform by quoting various bank CEOs saying that they will just have to raise other prices to counter their losses due to regulations.     My problem comes when he compares financial regulation to the CARD Act:

The same concept applies to credit cards as well. The CARD Act was meant to end the practices of imposing exorbitant fees and 30% penalty APRs on late credit card payments, along with other such evils. But in their place, we all got higher APRs, higher annual fees, and less attractive balance transfer offers.

The CARD Act was meant to curb unfair and deceptive trade practices, known as tricks and traps.  Everyone was subjected to these tricks and traps, not just those who you might consider financially responsible.   These practices that Chen dismisses as “other such evils” were real and were costing hard working Americans billions of dollars.   Yes, we have seen higher APRs and annual fees in their place, although higher APRs are mitigated by the abolishion of double cycle billing.    I would argue that it is a fair trade off as consumers are now easily able to shop for the best APR or the lowest annual fee, rather than be ambushed by tricks and traps later.

Chen contends that: “Consumer-facing regulatory changes over the past year tended to have one thing in common: preventing financial institutions from severely penalizing bad financial behavior.”

With all due respect to Mr. Chen, this is a bunch of crap.   If anything, the CARD Act has encouraged more financially sound behavior.   Higher APRs are a huge incentive to pay off your balance and become a “deadbeat,” industry slang for cardholders who never carry a balance.   Higher annual fees give someone less incentive to have a stack of credit cards.  Tricks and traps are, by their very nature unexpected.    Other then cut up your credit cards, there are few ways to reliably avoid tricks and traps beyond having your attorney scrutinize your credit card agreement.

Essentially what Chen is arguing is for more pointy objects on your dashboard.    You see, up until the sixties, cars were designed with all sorts of pointy metal objects on the steering wheel and the dashboard.   Even the glass would crack into knife like shards upon impact.   The inadvertent result was that victims of relatively minor car accidents would be brutally maimed as their faces impacted the steering wheel and dashboard while shards of glass rained down on them.     Later, dash boards were covered in plastic foam, and safety glass was developed.   By Chen’s logic, the automobile industry has gone about removing the severe penalties for dangerous driving, thereby encouraging more accidents.

In fact, he even goes so far as to cite less attractive balance transfer offers as one of the negative effects of the CARD Act.    That funny, as I always thought that transferring balances around from card to card was a sign that someone has not been managing their finances well.

All of his points are meant to support the argument that financial reform will somehow be bad for consumers in the end, yet he never really takes an honest look at how consumers have been mistreated by their banks.

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