Credit reform penalizing responsible

Freedom New Mexico

We noted in August the unintended consequences in the wake of Washington’s reform legislation to protect consumers from credit card interest rate hikes and penalties. Congress had restricted changes in credit card terms, citing complaints about high rates and penalty fees.

Even before the first wave of new regulations went into effect, banks began switching flat-interest rate accounts to variable rates to compensate for revenue they would lose under the new law.

Already, according to USA Today, 45 percent of consumers say their credit card issuers have increased interest rates or fees, lowered credit limits, increased minimum payments or reduced rewards programs.

Now another unintended consequence is being felt by consumers as banks scurry to make up for lost revenue when a second phase of rate and lending restrictions go into effect in February, further restricting how and when rates can be increased. The Associated Press reports that banks are identifying unprofitable accounts, in other words, consumers who don’t carry large balances, or who pay on time to avoid late penalties.

For example, Bank of America is testing implementation of $29-$99 annual fees, as one consumer credit card analyst put it, to see how much economic pain consumers will tolerate without canceling their credit cards.

The new annual fees, absent from the market for years for many consumers, will punish the most responsible credit card users, those who haven’t carried large balances or who regularly pay off their monthly charges.

“You could be spanked for staying out of debt,” USA Today’s Your Money columnist Sandra Block writes.

There are other unintended, consumer-unfriendly consequences set in motion by the government’s desire to help. Consumers will have to decide whether to cancel their cards or pay the new annual fees, which could run into hundreds of dollars a year for consumers with several cards. Conversely, canceling credit cards to avoid the new fees could detrimentally affect consumers’ credit ratings, determined partly by the length of time credit has been extended.

All of these unpleasantries stem from government’s well-intentioned, but poorly thought-out desire to give consumers relief. Once again, government’s solution is worse than the problem it would fix.