President Obama signed landmark credit card legislation last week, but some are wondering if the law goes far enough in protecting consumers against manipulative practices on part of the credit card issuers. The biggest criticism of the CARD Act is that it will not cap interest rates. Proponents of a cap were hoping lawmakers would make it impossible for card companies to raise interest rates above 18 percent. But John Ulzheimer, OTM's resident credit guru, says that would have been unreasonable.
The cap did not pass for good reason, he says. An interest rate cap presumes that Congress understands credit risk better than the banks, which is simply incorrect. Taking out a loan, whether it’s a mortgage or a credit card, is still a willful act and the competitive market should control rates, according to Ulzheimer. He believes if rates were capped at, say 15 or 18 percent, non-prime lenders would be put out of business and it would prevent the highest risk segment of consumers from getting loans from mainstream lenders and thereby force them toward unscrupulous lenders.
Carmen agrees in principle, but wonders why the law couldn’t at least cap rates at higher levels to keep them from ballooning to 30 percent or so, as they have to so many regular Americans.
The real deal on the new credit card law, according to Carmen, is that it’s up to all of us to pay off our credit card balances each month so that interest rates aren’t even an issue to begin with.