This is the fourth article of six examining Barack Obama’s “Economic Agenda” (www.barackobama.com/…/EconomicPolicyFullPlan.pdf). Here is an in-depth look at the policies he suggests to “Address Predatory Credit Card Practices".

1. Create a Credit Card Rating System to Improve Disclosure. Gives the FTC a mandate to “assess the degree to which credit cards meet consumer-friendly standards,” and “to provide consumers an easily identifiable ranking of credit cards.” They will target those “features that are deemed the most dangerous for consumers, including the underwriting standards used to issue the card, the card’s interest rate spread between the introductory rate and the maximum rate allowed, and transaction fees,” and will assign ratings and require disclosure of “simplified, clear language” of “the major features” of credit cards. This is another feel-good measure. Like the mortgage disclosure rules, it attempts to address apparent asymmetrical information problems. But the information is already disclosed; by assuming consumers don’t read it, this makes previous disclosures (fine print) even more ignored as consumers just look at the “simplified” summary. It also inhibits the development of legitimate credit products that some consumers need. This is a useless reform.
   Economic efficiency grade: D.
   Economic fairness grade: C.

2. Establish a Credit Card Bill of Rights to Protect Consumers. The original Bill of Rights was a list of limitations on the power of the federal government. The idea was that, while the federal government had specific, enumerated powers (beyond which they were not supposed to stray), even within those powers there were some areas that citizens could expect the government never to tread. In recent years there have been many mickey mouse “bill of rights” to protect or advantage one group of citizens against another. Insofar as these prohibit or uncover fraud, dishonesty, or coercive behavior between parties, they are useful. More often than not, however, they simply try to favor or advantage one party over another, with the full force of the government to back them; in these cases they simply limit voluntary trade and thus hurt both parties. Let’s look at the specifics of Obama’s “Credit Card [Holder’s?] Bill of Rights” and see which kind they are.

   • Ban of unilateral changes to credit card agreements without written consent from the consumer. This effectively makes changes to card agreements impossible. Without this flexibility, card agreements will be more stacked against the consumer, and unresponsive to consumer needs. You ever get into a phone plan that you thought was good, only to realize later that telecom prices had dropped dramatically and you were the only fool on the block still paying 10c a minute? Same thing will happen here.
   • Rate increases may only be applied to future debt. This idea has a weak understanding of financial markets. The debt that the card issuer carries has an expected term, and the interest rate assessed is in relation to that term. By freezing the rate the issuer can assess to the rate given at the time the debt was incurred, it forces issuers to assess long-term rates on short-term debt. Also, this will cause issuers to discriminate (unfairly) against debtors who carry debt loads for long periods of time.
   • Prohibition of interest on fees. This is rather petty, considering the fact that the IRS charges interest on penalties they assess. It is a standard accounting practice and there’s no reason why fees should be especially exempt from interest, let alone it be a “right".
   • Prohibition of “Universal Defaults” practice, whereby a credit card company raises a cardholder’s rate due to a third-party default. This is one way a card issuer can stratify their customers based on credit risk, which is perfectly fair and reasonable. Eliminating this option will ultimately result in fewer extensions of consumer credit. It also unfairly pools people who are making improvements in credit with those who are getting worse.
   • Requirement that payments be applied so as to minimize finance charges and pay off higher interest rates first. At most, the requirement should be that the issuer practices FIFO accounting of debt, i.e. that the oldest debt is paid first. But requiring that the payoff method always benefit the consumer is naive and inflexible.

   Economic efficiency grade: D.
   Economic fairness grade: D.

Overall, it is surprising that credit card reform has a standing in Obama’s economic plan equal to the more substantial goals of tax relief and economic stimulus. This is a political trick: a majority of voters have run into credit card interest and fees and bashing finance companies is easy populism. But putting greater restrictions on credit markets will only restrict economic opportunities for both creditor and borrower.