President Obama just gave a speech in New Mexico talking about credit card reform. Everything he said makes sense — as far as it goes. Just about everything about credit cards needs to be improved.
I’m concerned, however, that neither he nor Congress is willing to make the most important change of all — capping the amount of interest a bank can legally charge a credit cardholder.
Credit card debt is something the banks can’t secure and can’t sell off. But the banks are and have been well aware of that. It’s up to them to be careful about issuing credit cards in the first place. A credit card is an unsecured loan. It’s up to the bank to make sure it is issuing that loan to someone to someone capable of paying it off, just like any other loan. It’s up to the bank to establish a rate of interest and line of credit up front, so both parties know what is expected. Then it’s up to both parties to abide by the terms of that loan.
Credit card reform will require that these terms be spelled out clearly to the borrower. That’s a big step and an important one.
Still, no one seems willing to step in and cap how much interest the banks can charge. Constantly increasing interest rates on a borrower, as it was explained by a banker the other day, is to encourage the cardholder to pay off his balance as quickly as possible. Oh, really? For whatever reason, a cardholder is struggling to make his current payment, and the bank thinks piling on more and more debt is going to get that balance paid off faster??
Surreptitiously levying additional penalties, charges and fees until the total interest reaches 30% and beyond is usury, pure and simple. National usury laws should be established and interest rates capped. Until there is a legal ceiling on interest rates, banks will continue to fatten their profits by jacking up their rates to obscene levels. They will continue to issue cards to anyone who will take them, granting ridiculous amounts of credit to anyone, and then levying obscene interest penalties on those cardholders.
Congress passed a law in 1980 which exempted federally chartered banks from state usury laws. Not all states have usury laws, and some states are much more liberal than others. Naturally the big banks flocked immediately into the most liberal states, and they’ve been gouging cardholders ever since.
We had national usury regulations prior to 1980. We need them again.