My Keloland Colleagues and cherished friends, Todd Epp and Cory Heidelberger are very disappointed that our South Dakota Congressional delegation (all three of them) has voted against the credit card bill. Apparently, Stephanie Herseth-Sandlin and Tim Johnson were the only Democrats to oppose it. The reason for the opposition of our Senior Senator and Congressperson at large is pretty obvious: we've a lot of credit card business located in our state, and those businesses have been very generous when it comes to political contributions.
Unlike my colleagues, I am not the least bit offended by this. It's how the political system is designed. Also unlike my colleagues, I am a little interested in what the actual effects of the legislation will be, apart from the emotional satisfactions of sticking it to predatory lenders.
Lenders charge interest on the money they lend. I know that is shocking to Cory's Christian sensibilities (does anyone remember Shylock?), but it is makes the system work. Under current laws, credit card lenders make most of their money off people who don't manage credit very well, in the form of fees, penalties, and higher interest rates charged on balances after a failure to pay on time. That generates enough profit that lenders can afford to keep interest rates very low for people who bother to count. It means that imprudent borrowers are subsidizing prudent ones. Indeed, subsides thus produced are great enough that lenders actually end up paying some borrowers to use credit cards.
Does this amount to predatory lending? Maybe. It is surely burdensome to a lot of people. The legislation about to be passed will seriously reduce the burden on irresponsible users of plastic. It places stricter limits on the charges that can be levied on credit card users who don't pay off on time.
But the inescapable math dictates that profits lost on this portion of borrowers will have to be spread more generally across the population. Prudent borrowers will now have to subsidize the defaulters, as well as provide the profits that make the industry work. That means that interest rates on cards will rise, and rebates will be reduced.
It means something else. With occasional defaulters no longer being cash cows, the industry will have much more incentive to weed them out. The greater the protection that this legislation provides for borrowers, the harder it will be for people to get and keep credit cards. The proportion, I think, will be precise.
I am not sure that this legislation is a bad idea. Making credit too easy to get is one of the things that got us into the present economic situation. Making it harder to get might do a lot of good to a lot of people. But it will make this kind of credit harder to get, and more expensive. Credit cards are very convenient. Under the current system, even relatively irresponsible borrowers could get them, they just had to pay a lot more. Under this legislation, many such borrowers will be denied. Maybe that's a good thing.
Of course, we will soon hear sorrowful tales of people who can't get credit cards. And we will learn that certain well-defined subpopulations have a harder time getting them than others. Congress will want to right that wrong as well, and that will push the system toward one in which prudent borrows must heavily subsidize imprudent ones. Or it will push it to collapse.