Card Check

Is credit-card legislation necessary?

Credit card.
Why is everyone now in favor of credit-card reform?

In Congress, bashing credit-card companies is like coming out in favor of puppies. It’s not a particularly risky move. That’s especially true when the Federal Reserve has already announced new regulations that would require credit-card companies to do a lot of the stuff Congress is threatening to do.

Still, there may be some value in this congressional crackdown on Big Plastic. In April, the House passed a revised version of the Credit Card Holders’ Bill of Rights. The Senate is considering an even stronger version this week. Assuming it passes, President Obama may have a bill to sign by Memorial Day.

Credit-card companies think this is all a bit rash. They argue that cracking down on lending practices would dry up credit, squeeze the profits of an already ailing industry, and unfairly target these lending companies over equally irresponsible banks. Not to mention, puppies bark a lot and make a mess.

The companies also say that the new legislation would be redundant with recently updated Federal Reserve rules. Those rules, approved in late December, go a long way toward ending unfair lending practices. They prohibit unexpected interest rate hikes, give cardholders more time to make payments, and restrict deceptive billing practices like “two-cycle billing.” They also prohibit payment allocations that maximize interest charges—i.e., paying down lower debts before higher ones.

Shouldn’t that be enough? Obama says no. “I know you feel that anything beyond what the Fed has done would be overkill,” the president reportedly said in a private meeting with credit-card execs. “I just disagree.”

And the House and Senate bills do go further than the Federal Reserve rules. While the Fed would give cardholders 30 days before allowing companies to impose retroactive interest rate hikes, the Senate bill would extend that window to 60 days. Whereas the Fed would let companies market freely to people under 21, the House and Senate bills would force them to make sure the recipients are creditworthy. And say a cardholder is paying different interest rates on his balance: While the existing rules would allow a company to use the customer’s payments to pay down his various balances proportionally (as opposed to the current practice of paying the balances with the lowest rates first), the legislation would make them pay down the debts with the highest interest rate first.

These additional measures are all well and good—less unfairness is always better—but they don’t go significantly above and beyond the Fed rules. Nor are they going to take place much faster. One initial argument for passing legislation was that the Fed rules won’t go into effect until July 2010 while a law would take effect right away. But now it looks as if the bill wouldn’t become law for at least nine months or for as long as a year. In other words, until July 2010.

No, the real argument for the legislation—or against it, if you are the CEO of Visa—is that it would be harder to reverse. The Fed can change its rules whenever it wants. If a future Fed chairman felt that credit-card companies were getting a raw deal, he or she could simply issue a new order. Passing a new bill, meanwhile, would take a lot more political energy. (It would essentially require Republican domination on par with the Democrats’.)

Plus, there’s a bonus: Passing legislation allows Obama and the Dems to show they took active steps to crack down on credit-card companies. So what if the Fed already approved most of the reforms anyway? Now they can brag they did it themselves. And with three out of four Americans supporting credit-card regulation, there won’t be much political risk. They might as well throw in a free puppy.