Credit Card Caps Sounds Good But May Actually Be Disastrous

Since the signing of the Credit CARD Act, credit card holders have been the recipients of a barrage of credit card term changes, most of which are highly unfair and financially oppressive. With the economy quite weak and an unemployment rate still going up, American consumers really cannot take any more additional financial burden.

For a few months now, members of Congress have been hearing from their constituents about the credit card rate hikes that credit card companies have been busy introducing. Credit card companies, in preparation for the new credit legislation, have been rushing credit card rate hikes before their capability to do so is severely hampered by the new credit law.

In response to the outcry over interest rate hikes, a few members of Congress are considering introducing a cap on credit card interest rates. The proposal is to limit the maximum credit card rate at 16% and the maximum late fees to $15. While this may sound like a big win for card holders, it probably is not.

Interest rates are adjusted by credit card companies according to the risk that credit card holders carry. Riskier borrowers generally get higher interest rates while not so risky borrowers qualify for better terms. If a rate cap is introduced, credit card companies are no longer able to effectively use interest rates to manage risky borrowers. The most likely scenario is that credit card companies will no longer be extending credit to people with poor credit ratings. Even those with average credit ratings may find themselves unable to get credit. Ultimately, millions of American consumers will lose access to credit.

It will not only be credit card holders with poor to average credit ratings who will get hit, however. Even those with good credit ratings will have a hard time as well. Since credit card companies will no longer be able to profit from consumers with low and average credit ratings, they will most likely be making up their losses through card holders with good to excellent credit ratings. These card holders can then expect higher interest rates. Even those with excellent credit ratings will be likely to see their interest rates hike up.

The loss in terms of profits that credit card companies will face from losing consumers with low and average credit ratings will also mean that they will be scrambling to make up those profits from other sources as well. Most likely, those who are still able to keep their credit cards will have to deal with higher fees and a larger number of fees as well.