The widely heralded credit card reform legislation making its way through Congress is a sellout to the credit card companies. Obama has proposed and Congress has passed a series of minor reforms that deal with the fringes of the problem – late billings, retroactive interest rate hikes, misapplication of payments and such – but fail to reform the most basic offense of the companies: their usury.
Congress explicitly rejected any limitation on the interest rate credit card companies can charge. It remains perfectly legal for them to charge rates that would make a loan shark blush.
In our book Fleeced, we explain how, until 1979, credit card interest was subject to usury limits of the various states. But the Supreme Court emasculated these limits by ruling that the state of the lender, not of the borrower, had the sole power to legislate interest rate limits. South Dakota swiftly jumped into the void the Court created, eliminating any usury limits. All the credit card companies moved there and took advantage of the regulatory vacuum to hike up their rates to unconscionable levels.
Competition can do nothing to force down rates since 90% of the credit cards are issued by a handful of companies. And states are paralyzed when it comes to regulating rates.
It is up to Congress to act. Yet the credit card companies’ massive campaign donations succeeded in buying off enough Democrats and virtually all the Republicans to kill any limits on interest rates. So companies can continue to charge basic rates of 18 percent and then up to 30 percent as punishment for minor offenses like being a few days late in making payments.
But Obama and his Democratic allies are loudly proclaiming their success in fighting for the consumer despite their failure to use their majorities to afford any real protection form usurious interest rates.
Congress should have legislated a ceiling on regular interest rates limiting them to five points above prime and on punitive rates requiring them to be no more than ten points above prime. But Obama and the Democrats (and, of course, the Republicans) caved into the special interests and left out any interest rate controls.
The high rates charged by credit card companies obviously do a great deal to impede consumer spending and drive families into bankruptcy. The average credit card balance for those who have such debt is over $13,000. A 30 percent interest rate means more than $300 per month in interest payments alone!
It is cruel to see Obama offering the illusion of hope for credit card victims while denying them real relief.