Credit Card Industry Has Improved Practices
Credit cards have become essential in today’s marketplace, especially in today’s “e-marketplace.” They have evolved far beyond the simple payment device that originally was designed to provide convenience. Today’s credit cards provide substantial benefits to consumers, retailers and other businesses, and they have become a critical component in maintaining vigorous local and national economies.
Credit cards are used in more than $2.5 trillion in transactions a year in the United States. They have given many consumers access to safe and affordable credit and have enabled consumers to build a credit history. Credit cards have enabled retailers to sell their goods and services far beyond what was possible only a few years ago. Clearly, they have become an indispensable tool of our consumer economy.
Today, consumers have a choice between 6,000 credit card lenders. The Government Accountability Office recently has reported that competition among lenders along with risk-based pricing has led to more credit products at better prices for more consumers. The new disclosure regulations now being promulgated by the Federal Reserve will further increase competition and enhance the ability of consumers to make more informed choices regarding their financial needs.
The credit card industry has received a considerable amount of scrutiny lately, and while I certainly don’t deny that the issues we have heard from credit card users and our constituents are real and deserve careful examination, I think the industry has been reacting positively. I frequently hear from issuers about their changed or discontinued practices and more and better disclosures.
This, along with the complexity of the industry, has led me to believe that Congress needs to proceed cautiously with legislation and take into consideration the consequences of our actions. We need to make sure that we do not adversely affect the fundamental risk-based business practices that have led to lower-cost credit alternatives, broader availability of credit and appropriate return to company shareholders. Indeed, a paper soon to be released by economist Jon Orszag confirms that legislation restricting pricing and risk management could benefit only a very small minority of customers but impose greater costs (both in terms of higher prices and reduced access) to the vast majority of credit card holders.
We also need to keep in mind that the Federal Reserve’s proposals — 900 pages worth of changes to the way credit card terms and conditions are disclosed to consumers — have not been finalized yet. These changes are the product of years of consumer testing conducted by the Federal Reserve Board regarding open-end credit rules and are the Federal Reserve’s first comprehensive review of the credit card provisions of Regulation Z in almost 30 years. These changes will affect the format, timing and content of all credit card disclosures — driving uniformity and consistency across the industry. The rules will not be finalized until after the public comment period ends in October and should be given time to take effect before we proceed with legislation.
Additionally, Congress must be mindful of the GAO’s report on the credit card industry. The GAO has recognized that for consumers who choose to pay their balances in full each month, as more than half do, credit cards represent an interest-free loan. For those individuals who do not pay in full every month, many issuers offer payment options that enable consumers to manage their credit lines successfully and make the necessary purchases and payments. Any legislation that would tamper with risk-based pricing could increase the cost of credit to millions of consumers. A one-size-fits-all pricing model will lead to higher rates for those who repay their debts on time. The GAO report concluded with the recommendation to give consumers simpler, more meaningful disclosures so that the marketplace can work and consumers will have more notice and choice. The Federal Reserve is in the process of implementing these recommendations.
Any additional changes to credit card practices should be handled by the regulators who fully understand the details of the complex credit industry. The regulators are more likely to address the concerns without upending business models that have enhanced and made credit available to the marketplace. I think what House Financial Services Chairman Barney Frank (D-Mass.) said recently about the mortgage industry applies equally to credit cards: “Innovation has outstripped regulation.” This is a complicated and evolving business issue and the potential ramifications of mandating changes to pricing and risk evaluation include the two most critical components of what the GAO recently determined benefits millions of consumers. The regulators have a better understanding of the issues confronting the public and credit card issuers.
The banking industry is one of the most highly regulated industries in the world. The Federal Reserve and other agencies have the expertise to address Congressional concerns with great precision. They have the ability to create an evolving regulatory mechanism that gets input from consumer groups, the public, Congress and the industry. There are certain practices, which are undoubtedly questionable, that the industry is rapidly discarding. This leads me to believe that legislation that currently has been introduced in the House will likely be out of date before this Congress even ends.
Finally, we should not forget that consumers also have to take personal responsibility for their financial choices. A credit card loan is an agreement between two parties. Consumers must take personal responsibility for their credit card decisions and learn the terms and conditions of their loan. As with all financial commitments, credit cards carry important responsibilities for consumers. The industry has and should continue to create programs and tools to help consumers meet their financial responsibilities.
These are all important issues to consider and grasp particularly with the current uncertainty in the credit markets. Congress needs to give the industry time to adopt the Federal Reserve’s new guidelines that will give consumers a better understanding of their credit card conditions.
Rep. Mike Castle (R-Del.) is a member of the Financial Services Committee.