The Future of Credit Card Regulation

At the end of September as the debate over the $700 billion bailout of the financial markets raged on, the U.S. House of Representatives was able to overwhelmingly agree on a major victory for American consumers. By margin of 312 to 112, the House voted in favor of the Credit Cardholders’ Bill of Rights, which takes important steps toward leveling the playing field between consumers and credit card companies. Currently, credit cards are one of the most ineffectively regulated and confusing consumer financial products.

The bill includes several new requirements, including requiring that credit card companies give a minimum of 45 days notice before any increase in interest rates. That contrasts with their ability today to increase rates whenever they please. Bills would also have to be mailed 25 days before the due date versus 14 days under current law. With the exception of certain reasonable circumstances, credit card companies would no longer be allowed to retroactively increase the interest rate on existing credit card balances. In addition, consumers could no longer be charged late fees for payments that reach credit card companies before 5:00 pm on the due date. For further details about what else is in the bill, there is a great overview posted on the blog, CreditSlips.org.

The bill still has to pass the Senate and then President Bush, who has come out against it, would have to sign the bill for it to become law. However, this bill or an even better one may have a much better chance of passing next year. The Federal Reserve is also expected to release new credit card rules some time in the next few months.

The proposed changes in the bill are an excellent start, but many more steps can be taken to make credit cards work better for consumers without stifling access to credit or inhibiting innovation. In a recent paper published by New America, Michael Barr, Sendhil Mullainathan and Eldar Shafir, make several very interesting proposals to improve credit card regulation that build on insights from behavioral economics. The authors also offer additional proposals in their paper for improving the regulation of other financial services such as mortgages and bank accounts. To learn more about their proposals and a New America event later this week featuring Michael Barr and Eldar Shafir discussing their work, please see the events section of our website.

One of their specific recommendations for improving credit regulation calls for the creation of an “opt-out” credit card. All consumers would be offered a “safe” and standard credit card with straightforward terms and pricing. If they preferred a different type of credit card, they would have the option to opt-out of the standard card. However, credit card companies would be required to provide meaningful disclosure and be subject to increased liability if that disclosure is found to be inadequate. There are many details that would have to be answered before a proposal like this could be implemented, but it is an interesting start for developing regulations that encourage and enable individuals to make rational decisions when it comes to their finances rather than exacerbating or preying on their psychological weaknesses.