Payday LoansWhile writing our 5,000 word guide to the CARD Act I have become more sensitive to many of the portions of the credit card reform act that will most likely end up having the unintended consequence of hurting the very consumers that it was designed to help. A recent article by Becca Blond at the Colorado Independent makes the case that “Credit Card Reform May Push More Americans Into Payday Loan Hell”.

Here is a general framework for why it may very well be true that sub prime credit card users (bad credit credit cards) and even some regular credit card users who used to be able to get approved for a credit card with ease pre-CARD will now find themselves taking out a payday loan with interest rates of sometimes more than 1,000% (yes, 1,000% that is not a typo – check out our guide to usury & interest for more information).

Here is How the “Conversation” Goes

CARD ACT: “Let’s limit the fees and interest rates that credit card companies can charge on sub prime credit cards and other credit cards designed for those with credit problems.”

Credit Card Companies: “OK, since people with bad credit are (surprise, surprise) much more likely to just charge up money on their credit cards and then not pay us back then if we can’t charge high enough fees and interest rates to make up for that extra risk we are taking then we will just stop approving bad credit credit card applications.”

CARD Act: “Let’s make it illegal for credit card companies to assess interest charges using practices like double cycle billing, multiple over-limit fees, and universal default provisions.”

Credit Card Companies: “OK, we will stop using double cycle billing, multiple over-limit fees, and universal default provisions but that just means that it will make it harder for us to make money off of credit card balances and make it more difficult to assess default risk before it actually happens so we will just have to make it harder for even people with decent credit to get approved for a credit card since we won’t make any money off of them anyway and people with really good credit can get approved for a credit card but we won’t be able to give them as many credit card rewards and we will probably have to give them higher interest rates and annual fees AND now even people that pay off their balance in full every month – yea, we will have to raise their interest rates and fees right along with everyone else because now we can’t single out the high default risk users as easily anymore.

The Public: “Credit card companies are evil! How dare they make money issuing credit cards! I would like one myself because they are pretty convenient but we deserve low interest rates and no fees even if we have bad credit. How dare the credit card companies actually make money by providing us something we want and then charging us money for it!”

Credit Card Companies: “Sorry Charley, we have to stay in business. After all, even though everyone thinks that we just rake it in every year our profit margins are much lower than even a software company or companies in many other industries (although they are higher than the very low profit margins at health insurance companies which President Obama seems to think makes obscene profits so at least we are glad that the President has his focus on stirring up the people to criticize the “obscene profits” at health insurance companies rather than directing more populist rhetoric in our direction). In fact, even the Bank of America Credit Card Division lost a ton of money for 5 straight quarters so all of the people that take out a credit card and don’t pay us back or pay us late or the bazillion credit card transactions that we have to process securely and almost instantly all over the world while making sure you aren’t liable for any fraudulent charges – yea, that costs money.”

Consumer: “Hmm, so now that the CARD Act is here I have less options for credit… I guess I will apply for a few credit cards and then if I can’t get approved for a credit card there’s always a couple payday loan stores on almost every street near my house..

Payday Loans vs Starbucks vs McDonalds

Benefits of the Credit Card Act

Don’t get me wrong there are a lot of things that I like about the CARD Act. I love the provisions that make credit card companies more transparent, colleges disclose any relationships that they have with credit card companies, and other provisions that promote transparency in marketing, underwriting, and issuing credit cards BUT the only benefit that will come from the government stepping in and forcing credit card companies to underwrite credit cards in a more restrictive way will only end up making it harder for consumers to get access to credit and will quite naturally drive many consumers to choosing payday loans and other horrible choices for borrowing money (which is perfectly within their rights as a consumer but why does the government think that providing less options for credit is a good thing?).

Since When is Less Choice Better for the Consumer?

In a nutshell, consumers should have as many choices as possible. If they want to apply for a credit card that charges them fees up the wazoo then they should be able to. If they want to take out a payday loan that charges 1,000% interest then they should be able to. If they want to do the responsible thing and research the best credit card offers and find a good cash back credit card that they will use to live within their means and pay off the balance in full every month then they should be able to do that too. Wait… is it because maybe people A) Don’t want to face reality and use a calculator like our true cost of credit cards calculator to see just how much that new pair of shoes really costs if they buy with a credit card but only make the minimum payments or maybe people B) Don’t want to admit that your credit card debt is your fault! ??? Maybe it’s just easier to let the government slowly take control of as many things as possible because they know best and we are not smart enough to make choices for ourselves, right?

CARD Act Regulations for Transparency in Credit Cards = Clear Understanding of Credit Card Features and Options = GOOD!

CARD Regulations for Forcing Companies to Cap Fees/Interest Rates and Underwrite Credit in a Certain Way = Less Options for Consumers = BAD!

Do you think that the credit card reform act will end up turning many past bad credit credit card users into payday loan users?

Do you think that the CARD Act will end up having many unintended consequences that will end up harming consumers more than helping them?

What are some of the unintended consequences of the CARD Act?

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6 Responses to “Will the CARD Act Turn Credit Card Users into Payday Loan Users?”

  1. Looking at the scope of the payday loan places and the charges applied it makes you wonder why congress didn’t go after them first if not at the same time?

    • Joel says:

      It does seem rather strange that if one was going to impose some type of limiting legislation that they would start with credit card companies rather than payday loan companies but IMO I would vote to let both payday loan companies, banks, and credit card companies charge any type of interest rates that they want as long as they are honest in their marketing and full disclose exactly how their products work, wouldn’t you agree?

  2. Evan says:

    Anytime the gov’t gets involved there are unintended consequences. Anyone that thought the CC companies were going to leave the billions upon billions on the table, were either stupid (Congress) or just didn’t get how for profit corporations work.

    • Joel says:

      Yep, what is unfortunate is that those unintended consequences are usually much worse than any of the original problems (especially in the long term), wouldn’t you agree?

  3. Tracy says:

    Wow…that graph was disturbing. Credit card debt is the fault of the consumer, but we fail when we don’t educate consumers in financial responsibility right up front, like beginning in elementary school. I don’t know how effective government regulation will be, but fewer credit options may not be a bad thing when it comes to a sustainable economic system. Credit companies (all of them) have proven that they wont regulate themselves or work try to come up with a business model that is profitable, but responsible when it comes to being members of a larger human community, so regulation was probably necessary.

    • Joel says:

      Thanks for the comment Tracy and I definitely agree with you that more financial education is a good thing. I would even go so far as to say that since most parents aren’t doing a very good job of teaching their kids about financial things (maybe because they don’t know a whole lot themselves in the first place!) there should should be required high school and college courses on personal finance.

      On the financial education issue I can definitely agree with you but on the “fewer options” is better line of thinking I have to say that I respectfully disagree.

      Wouldn’t you agree that more choices would be better for the consumer? (Especially if there was a strong push for financial education as we both agree on and consumers could make good choices and companies that offer poor options will either go out of business or be forced to come up with better products to compete)

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