Credit Cards and Predictable Unintended Consequences

Imagine being a contractor and regularly using your credit card to purchase building materials for your job. Without warning you receive a notice that effective immediately your credit limit has been cut in half. You face potential embarrassment with your clients as your ability to purchase needed materials has suddenly changed. How will your business function? You always paid your bill on time. Who is to blame for this mess?

There have been several stories in the news media recently about people facing unexpected and dramatic reductions in their credit limits. Other people are finding that their interest rates have climbed for no apparent reason. These sudden changes in credit-card terms are causing real inconveniences for thousands of people.

I read one report about a person with whom I readily identify because I, too, do not carry cash. This person was traveling when his credit card was canceled out of the blue. (As he was traveling, the letter informing him of this was waiting for him at home.) Suddenly, this unfortunate traveler could no longer even buy lunch.

The embarrassments and challenges faced by people whose credit-card terms suddenly changed are predictable. And we are seeing the unintended consequences of the government trying to protect us.

Congress recently passed the Credit Card Holder Bill of Rights, which takes full effect in February. In a promotional piece from my congresswoman, she explained that she voted for this bill to protect consumers by making sure they knew the terms of the credit-card agreements.

Quite frankly, I did not need to be protected by my congresswoman. I read my cardholder agreements. We recently received a letter from one of our credit-card companies informing us that our interest rate was going up. We called customer service to be sure we understood the letter correctly, which we had. Why would anyone make a business deal without reading and understanding the fine print? Under the new law the print will no longer be fine, but will the people who did not read the fine print read the bigger print?

Perhaps we pay little attention to contracts because we have found that contracts may not be enforced and we do not need to be responsible. We see big time investors and executives getting bailed out as well as people who were greedy and bought more home than they could afford. When things go wrong, we are victims and the government will help us.

Credit cards are one of the most powerful financial tools that ordinary people can easily access and use. I am a very poor target for thieves because I do not carry cash. When cash is stolen it is gone. If my credit cards are stolen my liability is limited. I have peace of mind that in previous decades only the wealthy had because I know I have enough purchasing power to get myself out of jam. As with any tool, people can hurt themselves with credit cards.

One of the most amazing things about credit cards is that one can acquire significant purchasing power without having significant assets.
Credit-card debt is unsecured. Credit-card companies carefully and continuously evaluate the risk of potential default for all of their clients.

The Credit Card Holder Bill of Rights takes away some of the credit-card companies’ techniques for managing risk. For example, currently if a person misses a payment on Card A, his interest rate on Card B may go up immediately. This makes sense because by missing a payment on Card A the person’s risk of default on Card B has gone up. That this is possible is stated in credit-card agreements. Beginning in February credit-card companies will not be able to raise interest rates as quickly.

The consequences of these changes are predictable. With their ability to efficiently manage the risks of individual card holders about to be restricted by law, credit-card companies are preemptively managing risk.
Contractors whose cash flow might be severely restricted during a recession are having their credit limit severely cut. People who need to use their credit cards to get out of a jam will be paying higher interest from the beginning. The people who are seen as being the biggest potential risks may not be able to get credit cards in the first place. There is talk of rewards programs being scaled back or eliminated.

Responsible users of credit cards are being harmed as a result of the government trying to protect us. Most people who use credit cards unwisely will still have enough access to credit to get themselves into trouble. There is no legislation that can magically cause people to be wise. Telling the unwise that they are victims will not help them become wise.

Unfortunately, the victims of the Credit Card Holder Bill of Rights are blaming the credit-card companies rather than the government for the embarrassment and higher interest rates they now face. You Tube is awash in videos of people creatively destroying their credit cards. Yet, lower credit limits and higher interest rates for all were predictable unintended consequences of a government protection plan.

— Dr. Joseph J. Horton is an associate professor of psychology at Grove City College and a researcher on Positive Youth Development with The Center for Vision & Values.