Co-blogger Vance Ginn has nicely laid out some of the perverse, probably unintended, but definitely foreseeable, consequences of the federal government’s proposed $8 cap on the amount that credit card companies are allowed to charge credit card holders when they are late on a payment.
I want to point out two other consequences, both of which are perverse but one of which is especially perverse.
First, though, my personal story. Every once in a while, while I’m traveling or particularly busy, I’ve let slip a payment date and paid a credit card balance late. It happened only a couple of times because the credit card company taught me virtue with a $30 to $35 late fee. Ouch! I got very careful.
Now to my point about consequences. If the regulation is implemented, then, as Vance points out, credit card companies will adjust. He names a few adjustments.
One that he doesn’t mention is that they will, to the extent that can do it, try to figure out ways of charging more to people who are late. It might be by upping their interest rate once they’ve recorded x number of late payments over y number of months. It might be other adjustments that we don’t know but that some of the credit card companies’ best minds will think hard about.
What that approach has going for it is that it targets the higher charges to those who are causing the problem. These other approaches they might take are presumably less efficient than high late charges, or else they already would have been taking them.
But what if the credit card companies can’t figure out how to target the higher charges to those creating the problem? That’s when we get the kinds of adjustments Vance talks about, such as higher interest rates on everyone. This is particularly perverse because it causes people who were not creating the problem to pay more.
One other point that doesn’t relate to credit card fees but does relate to usury laws.
Shortly after I moved to the United States, in the fall of 1972, I applied for a Visa credit card with a credit limit of–are you ready?–$250. That was the lowest amount you could apply for. I was turned down. My guess is that the reasons were twofold: (1) I was not a permanent U.S. resident, so the company might have feared having trouble collecting if I didn’t pay and moved back to Canada; and (2) I had no credit history–no car loans, no any kind of loans.
I thought that living in the United States longer would help. So in 1974, I applied for a Mastercard with a limit of $400, the lowest that Mastercard granted. I was turned down.
By 1975, I finally got a credit card. I think I know the reason: the change in usury laws. When credit card companies gave out cards in a state, they were under the usury laws of that state. If I recall correctly, the limit on interest rates in California at the time was 11%. That wouldn’t be a good rate, from a credit card company’s viewpoint, for an unknown risk who could easily leave the United States. But a federal court decision around 1975 established that credit card companies could charge an interest rate consistent with the usury laws of the state in which the credit company located. So a number of them located in South Dakota and other states that had no limits on interest rates. I finally got a card with a high interest rate. And I rarely had to pay it because I made it a point, except in extreme circumstances, to pay the full balance down each month.
We often hear about the absurdly high interest rates that credit card companies charge to young people with no credit history. But they’re simply adjusting for risk. I would have rather had a credit card charging 24% interest in 1972 than no card in 1972.
READER COMMENTS
Dylan
Apr 7 2024 at 2:03pm
On your personal story, the logic makes sense, but I’m curious. I have a Canadian friend that moved to the U.S. in 2019 to get her Masters. Good credit in Canada and has made a very good income in the U.S. for the last couple of years, but she was only recently approved for a credit card here after trying multiple times. She said it was something to do with her credit not transferring to the U.S?
I didn’t get a credit card until I was 30 years old, and I was surprised to have been accepted because I had never put anything under my own name for the majority of my life. Yet, I not only got approved, I had a really high limit. At some point a couple of years later I ran a credit report and saw that they showed my oldest credit card going back to a few years before I was born. Never did figure that out, but a couple of months ago I saw my credit dropped by about 20 points and the culprit seemed to be they dropped that oldest card off of my credit history finally.
Craig
Apr 10 2024 at 4:26pm
Do you happen to share the same name as one of your parents? I had a JC Penney card on my credit report from before I was born, likely belonging to my dad who had the same name. I also had to jump through some hoops when applying for a job due to a DirecTV collection on my credit report from when I was 10 years old, also thanks to my dad.
Ahmed Fares
Apr 7 2024 at 3:58pm
The other way credit card companies make money is merchant fees. If you force a cap on them, the merchant fees will rise to offset, which affects everyone, including those of us who use credit cards for transactional credit.
BC
Apr 8 2024 at 1:48am
When I’ve missed an occasional payment date, I’ve found that I’ve often been able to have the late payment fee removed just by calling Customer Service and (politely) asking them to. Like David though, I’ve found that even the hassle of needing to call Customer Service is enough incentive for me to be conscientious about paying on time. (Also, if one misses too many payment dates, then they won’t waive the late fees, which is also a good incentive to pay on time.)
The willingness to waive fees upon request shows that credit card issuers are very customer friendly (as is the case with most American businesses btw). There is very little differentiation among issuers’ Visas and Master Cards so they compete pretty hard to attract and retain customers. They know that if someone goes through the hassle of calling Customer Service, then there is at least the risk of losing the customer if they don’t waive the late fee. With such little supplier market power, the case for regulating fees becomes even weaker.
Most likely, the high late fees exist to handle chronic late payers. As David points out, limiting the late fees may very well end up penalizing those that are not chronically late.
Herb
Apr 18 2024 at 10:23pm
I always pay my cards off on time through my bank account. (I have only missed once or twice.) I mis-keyed a payment one time & owed $0.17. They charged me the full $35, so I called & the person reversed the fee without any hassle.
Anders
Apr 8 2024 at 6:42am
The intent is laudable, prevent credit card companies from overcharging vulnerable consumers in a country where credit card debt is singularily pronounced a phenomenon.
The problem is that if those companies then resort to indirect, creative ways of imposing those charges, they will become even less tangible and inscrutable and perhaps trigger even more irresponsible use of high cost credit for consumption only. The real, high costs will become much less transparent and the limit might create even more perverse incentives.
Yet it is a problem indeed. Perhaps the only sensible albeit highly illiberal solution is to clamp down on it big time, as here in Europe where credit card debt is almost unheard of (though it has shifted to other innovations, such as the infamous sms loans). At any rate it might be preferable to microregulations.
Just to see how an uberliberal audience like that of this forum will react 🙂
Craig
Apr 11 2024 at 8:36am
“resort to indirect, creative ways of imposing those charges”
Indeed, at times they feel like ‘gotcha’ fees….I called and got one waived because payment due on a Sunday, I triggered the payment Friday thinking they’d get it Saturday or that payments due on a Sunday would still be timely if received Monday. Come Monday I did check and the charge was there, called and they did waive it, but how many people don’t call.
Paul
Apr 11 2024 at 6:40pm
When I came to the US from Britain in the early 1980s, I was advised to buy my car on credit even though I could afford to pay cash (it was a really old run-down car for a few hundred dollars). I had been turned down for credit cards when I first arrived (while had a rental car paid for by my company). But after a few months of paying my car loan, I had (minimal) credit history but enough to not get turned down. Of course, when I got a mortgage a year or so later, credit card pre-approvals were in my mailbox on a daily basis. It’s easy to get credit when you don’t need it and hard when you do.
Anders
Apr 21 2024 at 9:40am
Yes, that is one of the most striking features I found moving to the US at a young age.
And am the only one to see the parallels with what lead to the opiate epidemic? Equally easy to get even stronger opiates for minor pains, equally easy to get trapped, and in some cases equally life destroying.
Knut P. Heen
Apr 12 2024 at 6:10am
“Democracy is the theory that the common people know what they want, and deserve to get it good and hard.” H.L.Mencken
You can teach a politician that price controls don’t work, but can you teach the marginal voter that?
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