Credit Card Hikes

At e21, we’ve argued that the passage of the CARD Act in early 2008 has led to a number of negative side affects. The bill was designed to curb abuses by credit card companies, and instituted a variety of restrictions on the ability of credit card companies to change rates at will.

Whatever the merits of this proposal, which recently took effect, it’s clear that the bill has led to credit card companies responding in unanticipated ways. Now that they are unable to raise credit card interest rates at will, credit card companies have responded by raising interest rates across the board for a number of customers.

As a result, credit card interest rates, as the Wall Street Journal reports, are at record highs. To be sure, part of this increase may reflect other economic conditions. However, it is interesting to contrast the hike in credit card interest rates with interest rates charged on other categories of loans, which remain low. For instance, the prime rate—the benchmark at which credit card rates are set—remains at historic lows.

Since many Americans use credit cards as a primary vehicle for payments, higher credit card interest rates have forced many to cut back on purchases, which has a contractionary impact on the economy. Supporters of the bill may choose to emphasize the positives. For instance, the sponsor of the CARD Act, Carolyn Maloney, was quoted in the Wall Street Journal article as saying: "Better that consumers should know up-front what the interest rate is, even if it's higher, than to be soaked on the back-end by tricks and hidden fees."

This sort of frank talk is refreshing, but it highlights the tradeoffs inherent in consumer protection laws. Laws that restrict the supply or availability of credit may result in higher costs of credit for struggling Americans. These nuances are not typically emphasized by supporters of consumer protection, like Elizabeth Warren, who portray these issues as a war between everyday Americans and the banking industry. There are no free lunches here; measures in this area that are designed to help some group of consumers will almost surely negatively impact another group.