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Singletary: Good riddance to the credit subsidy

Published: Wednesday, May 27, 2009 2:16 PM MST

Credit card users who crow that they seldom are charged interest on purchases because they pay their bills on time may not be able to crow much longer.

President Obama signed into law Friday new restrictions on the credit card industry that lenders say may lead to the return of widespread use of annual fees.

Perhaps that’s how it should be.

Wait, wait, hold your ire! Don’t write me a nasty letter or e-mail just yet. Hear me out.

I know many of you feel entitled to use a credit card without any cost because you diligently and responsibly pay off the bill before the due date. But did you ever stop to think what that is?

You probably never considered that the credit pushers made your access to “free” money possible by gouging the less fortunate with hideous penalty fees and wicked double-digit interest rates. Effectively, the most financially vulnerable consumers have subsidized the low interest rates and rewards programs that the more financially secure enjoy.

I know what some of you may be thinking. “Good for me, too bad for them. That’s how capitalism works.”

Right you are. That is how capitalism works. And at times it’s a selfish system.

We live in a society where many people who do well can’t sympathize with those who don’t. We’ve created a culture where people live by the mantra “I pulled myself up by my own bootstraps” or “I got mine, it’s up to you to get yours.”

The recent push in Congress to halt some of the industry’s most egregious practices was aimed at giving some relief to less-fortunate consumers buried under credit card debt. Certainly many lower- and middle-income people irresponsibly racked up unnecessary charges, but others resorted to credit to pay for medical expenses because they lacked health insurance. They were using credit to buy groceries or make needed car repairs so they could get to work.

Demos, a nonpartisan public policy research and advocacy group, took a look at which credit card users were the worst hit by credit card practices. In a report called “The Winners and Losers of Credit Card Deregulation,” the organization pointed out that low-income and lower-middle-income cardholders were about five times more likely than the wealthiest cardholders to pay more than 20 percent interest.

The Demos report separated credit card users into four categories:

Nonusers, who carry credit cards but do not use them.

Convenience users, who accumulate balances each month but pay them in full without incurring interest charges or fees.

Revolvers, who accumulate balances each month without paying them in full and as a result incur monthly interest charges.

Late payers, who miss deadlines or skip payments altogether, accumulating balances and incurring high interest charges and late fees.

The revolvers and late payers are the credit card industry’s most lucrative customers. While I won’t argue that lenders should be able to charge more if someone is a higher credit risk, many of the fees and penalty interest rates unfairly deepen people’s debt.

It won’t be long before the industry responds to the new restrictions with new or old income-generating ways to make up for lost revenue.

Already the language from the lenders is pitting so-called “good” credit card users against “riskier” ones.

“Those who have managed their credit well and currently have very good credit card deals will find that card companies are limited in their ability to distinguish between them and those that have credit problems,”

Edward L. Yingling, president and chief executive of the American Bankers Association, said in a brief written statement following passage of the credit card legislation. “The result will be some subsidy from those that manage their credit well to those that have problems, affecting negatively the terms the former will receive.”

Yingling added that the “new rules will limit the ability of card companies to price according to risk.”

No, they won’t. There’s nothing in the law to prevent the companies from charging higher interest rates to irresponsible or riskier borrowers.

What the industry is lamenting is that they won’t be able to continue gouging lower- to middle-income cardholders. It means these people won’t be subsidizing convenience users.

This change won’t be easy for some, as evident from the following comment I received from a reader during a recent online discussion. The person wrote: “I am fortunate enough to be able to pay off my credit card bills in full every month and on time. I am concerned that, with the new legislation, my American Express annual fees will go up and I will get asked to pay annual fees on the MasterCard and Visa, both of which are now free.”

No, those cards were never free.

Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her e-mail address issingletarym@washpost.com. Comments and questions are welcome, but due tothe volume of mail, personal responses may not be possible. Copyright 2009, Washington Post Writers Group


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Reader Comments

The following are comments from the readers. In no way do they represent the view of gvnews.com.

LARRY KLOSE wrote on May 29, 2009 8:56 PM:

" Your column makes some good points but omits one important subsidy to credit card issuers that most commentators omit: merchants and other businesses which accept credit cards must pay a fee to the clearing house for the credit card between 1 and 3 % per transaction. Some companies demand more: I've had several merchants say they avoid taking American Express cards because of the high fees. They've asked me to use another issuer's card. Some merchants ask for checks, debit card transactions or cash when I ask about their preference--it costs them far less.

This undercuts your premise that those who pay their balances each month somehow are subsidized by the other card users who carry a balance. The effective APR of a 3% processing fee is 36% per year, so no one is getting a free ride. Those who carry a balance each month make a choice to add the additional high interest rate to this charge.

The second overlooked issue in the whole credit card debate is the unwritten assumption that banks should be allowed to gouge a different group of customers to make up for the revenue lost from gouging the now protected group. High credit costs are not an entitlement and before the Reagan-Bush juggernaut, there were statutory limits on excessive interest rates--then defined as usury. Such limits go back to the beginning of our system of jurisprudence. The idea that such credit should be used to allow banks to cut loose and operate like loan sharks is a relatively recent phenomenon. The major difference is that banks bought themselves the ability to coerce borrowers who couldn't pay the outrageous rates by lobbying for the most recent changes to the bankruptcy code that burden debtors for life when they can't pay the freight. It's better than breaking legs, but not by much.

Look at the whole system before you crow about trashing the most responsible card users. No one deserves a subsidy, but no one deserves to be unfairly smeared for using the system as it stands.

Me? If banks start charging interest on day one, I'll start using my debit cards or return to writing checks. I should probably do so anyway to help the small businesses the processing fee hurts the most. "

Mike Susinski wrote on Jun 1, 2009 7:04 AM:

" I was going to comment, but Larry Klose said it better. Banks would rather handle electronic transactions and no one has denied that the ability to buy now pay at the end of the month encourages purchases which might not otherwise happen, for better or worse. "

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