I heard law Professor Adam Levitin of Georgetown University on NPR’s Fresh Air program last week. Professor Levitin is one of the contributing authors on the blog Credit Slips. In his interview, Professor Levitin talked about the recently enacted credit card law — Credit Card Accountability Responsibility and Disclosure Act of 2009 (aka Credit CARD Act, clever, huh?) — which placed limits on certain credit card practices like retroactive interest rate increases and marketing to consumers under age 21.
Professor Levitin said the legislation’s approach is wrong. He said if you ban A, B, and C, they will come up with D, E, and F. He suggested instead of banning specific practices, we should standardize most part of the credit card contract. Credit card companies can still price their products however they want. They just fill in the blanks in the standard contract with their numbers. That way consumers can compare the contracts and decide which product is best for them.
I relate to my recent experience in refinancing my mortgage. Much more is at stake with a mortgage than with a credit card. Yet when I signed the long promissory note, I only focused my attention on a few places: principal, interest rate, term of the loan, interest rate fixed or variable (fixed), prepayment penalty (none), due date (1st day of every month), grace period (15 days), and late fee (5%). The rest was pretty much standard. I agree with Professor Levitin when he said credit cards are much more complex with many more prices than a straight-up loan. For people who carry a balance, it’s very difficult to compare and understand all the different prices.
Ideally nobody carries a balance on their credit cards. But that’s not the reality. Borrowing from credit cards is legit. So is charging interest on such borrowing. We just need to make it much more straight forward. If you borrow money, you pay interest, plain and simple. Standardizing the credit card contract is a great way to do it. Between reading the contract and protecting the consumer, I vote for protecting the consumer.
I say this as someone who currently enjoys the float, the rewards, and free rental car insurance from credit cards. I’d like to see the credit card market bifurcate into two:
- True credit cards with no annual fee, no grace period, no rewards, no or low merchant fees, and no surcharge at the stores. You pay interest for the money you borrow.
- Deferred debit cards which automatically debit a linked bank account, with an annual fee (maybe), a grace period, rewards, higher merchant fee, and a surcharge at the stores. If you like the convenience, the added protection, the float, and the rewards, you pay for them. If the merchants want to attract you with your higher spending, they will subsidize you. It will be up to each merchant to decide how much they will subsidize and up to each consumer to decide whether the benefits are worth the surcharge.
I think that’s a much fairer system than the one we have now. At the point of each purchase, the consumer decides whether to
(a) pay now by cash or debit card; or
(b) pay later by a deferred debit card with a surcharge; or
(c) pay later by a credit card with interest
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There’s been some chatter in the blogosphere lately about a “Treasury Express” card. (Google it to pull up some posts.)
For a nice discussion of a typology of credit see also Plastic Fantastic at Interfluidity.com and related posts there.
Harry Sit says
@TIE – Thanks for the pointers. I don’t think the government has to step in and provide a “Treasury Express” card. The market in the U.S. is distorted because of oligopoly rules that prohibit merchants from surcharging credit card transactions. The merchants bear the cost, the “transactors” reap the rewards, the credit card companies take the profit in the middle. Under these conditions, credit cards are over-used. We need some policy intervention to realign the cost and benefit. Other countries and the European Union have successfully done that. See the presentations at a recent conference held by Federal Reserve Bank of Chicago, Payments Pricing: Who Bears the Cost?.
@TFB – I think we both have an interest in two-sided markets, you for credit cards (about which two-sided theory has been applied by several authors), me for health insurance (about which only a little has been done from a two-sided perspective). I’ll have posts on two-sided markets soon. If you want links to papers relevant to credit cards, let me know.
Ya know, that would be a disturbingly elegant solution.
Quick issues would be… if two different cards charge different fees, how do merchants cope? As for charging different surcharges, it”s kind of “repugnant” as freakonomics would state. It’s awkward… esp. when it’s just two different types of cards. Offering discounts for cash comes easier it seems.
If we went entirely into a digital $$$ system wouldn’t that eliminate part of the issue =)? (I wonder if we hit a society that was pure digital $, there’d be surcharges on purchases with physical cash hehe)
1. Looks too dangerous still..
2. And I wouldn’t use 2…
Harry Sit says
@SJ – Some countries like Australia allowed surcharging. The merchants there coped just fine. Some surcharge credit cards. Some don’t. With graphical card terminals, displaying the prices for different card types shouldn’t be a problem.