Congress Moves to Hose People Who Pay their Debts

This story boggles my mind.

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

Like Moe Lane, the second my credit card company charges me interest at the point of purchase, I’ll cut up the card and never do business with that company again.

I’m pretty much at my last end with Congress. I have no doubt that if we dug just a little bit (farther than the reporter with the Times dared to dig at least) we’d find that there were more than a few well-connected campaign contributors at the happy end of this legislation. There is no good reason for this legislation. It will inevitably hurt the people it’s trying to help — the folks who can use a credit card to help rebuild their credit rating — because credit card companies will simply stop giving credit to people with ratings on or over the ragged edge. Why on earth would you extend credit to someone with a spotty credit record without a reliable way to ensure you get your money back? One of the reasons for high penalty fees is to act as a strong incentive to pay the debt back or, lacking that, to ensure that when the company has to take legal action, they can get as much of their money back as possible.

Of course, if you pay off your bill monthly, you can rebuild your rating and get cards with lower rates. You would, before this legislation, avoid any fees as well. Now, thanks to Congress’ ignorant meddling, folks like that are hosed.

UPDATE: Andrew Malcolm is wondering why Senator Dorgan’s so down on Hello Kitty and so up on his own party’s unprecedented deficit spending.

Now, what in the world of change-to-believe-in stimulus spending could possibly be wrong with a little old credit card company teaching youngsters how the American capitalist economy works — that is, by almost everyone except a few aunts buying way more than they can possibly afford and postponing those desperate days when the bills come due with immense interest charges? And counting on their income somehow growing to match the increased debts?

After all, isn’t that precisely what these very same grown-up congresspersons are doing with the federal budget, spending way more than the government can possibly afford and postponing those desperate days when the bills come due with immense interest charges? And counting on their income somehow growing to match the increased debts?

UPDATE 2: The bigoted Jane Hamsher has noticed my post and attempts to give me an economics lesson. From what she’s written, I hope that she’s not handling her own retirement investments.

AllahPundit runs the right wing blog with the highest traffic, but he doesn’t seem to be able to read. A “deadbeat,” as the NYT article clearly states, is “industry parlance” for people who pay their credit card bills on time “because they generate scant fee revenue.” (See The Economist, Going after the paying “deadbeats.”) In other words, the term “deadbeat” (or so he claims) refers to him.

As Anonymous Liberal points out, “deadbeats” like AllahPundit have been getting a free ride for years. But the right wingnut welfare crowd, who think that they’re entitled to free credit cards (like Moe Lane and the Sundries Shack), are having a hard time adjusting to the notion that if you generate no revenue, you give the banks no reason to extend their services to you. It’s called capitalism, and once again, the wingnuts get an “F” on their ability to grasp its basics.

First, let me recommend to Jane that she take a quick trip to the dictionary, where she may learn that “scant” is not, in fact, a synonym for “free” or “no”.

While she is there, she may also notice that there is an actual definition of “deadbeat” that is used by everyone outside the credit card industry and it is that definition that Allah is using.

Now, back to the “scant revenue” thing and Jane’s retirement investments. Let’s say that Jane has a couple hundred thousand dollars in various investment vehicles. It’s pretty like that her financial adviser, who unlike Jane knows something about economics, has recommended that she put a good chunk of that money in relatively safe but low-return investments (or, in credit card industry parlance, “deadbeats”). The rest of it, her adviser would suggest, could then be put into higher-risk investments that could reap a much larger gain. That was she’d make a good return with most of her money remaining fairly safe. The “deadbeats” allow her the safety she needs to put some of her money at greater risk for a much greater reward.

So it is with credit card companies. Credit card companies are content with most of their money lent out to folks like Moe Lane and me, who accept a small fee but who pay our bills completely and on-time. Indeed, those companies need the lion’s share of their borrowers to be just like us. The company makes a “scant” amount of money for their trouble, but their money is safe and the revenue stream is steady.

That security allows the companies to loan money out to people who are less likely to pay it back on time (or at all). In return, those dodgier lenders pay higher fees for the privilege. This is all basic economics and risk management but it also involves some knowledge of how capitalism works so I can understand why a staunch progressive like Jane gets it all screwed up.

Now, here’s why the bill is bad. If the investors can’t get the return on risky investments they once could because the government has stuck its nose where it doesn’t belong, they don’t have many options. The natural impulse is to try to get more money out of the safe creditors and hope they get enough to make up the difference.

To keep their revenues at the same level, credit card companies are going to have to charge their good borrowers more to make up for the revenue they won’t be getting from the bad borrowers. In other words, the majority of us who handle our business well enough are going to get stuck with the bill for those who don’t.

Of course, the other option is for the credit card companies to cut expenses by laying off employees in which case the Democrats’ would have been responsible for yet more people without jobs.

Tags: Democrats, Economics, Nanny State