Naturally, the Law of Unintended Consequences is already rearing its ugly head, this time in relation to Congress’ restrictions on credit card companies and their “fairness” to consumers.  To refresh your memory, Congress recently enacted a sweeping bill of restrictions on card issuers that included restrictions on late fee, interest rates, payment terms, and recourse.  On paper it all sounds great, but as is usually the case, it has led to consequences that were not initially intended and that could have been easily foreseen.

You see, in response to the new limitations, credit card companies have been closing marginally problematic accounts at a record rate, lowering credit limits of those remaining (regardless of history) and accelerating increases in interest rates all before the wire - so to speak - when the law takes full effect in January.  This is the nature of the game we are all playing: save yourself first and that’s what the credit card companies are doing as well.

Well, here’s the issue: unsecured lines of credit (credit cards) are the riskiest kinds of debt for a lender to incur because these lines have no collateral. What I mean is, if you a person who used their card for things like a trip, groceries, clothes or services, what exactly could be repossessed by your creditors for non-payment?  Unlike a car or home loan, where there is something of value to take if you happen to default on payment, for a credit card there usually isn’t.  Therefore, the interest rate on cars and homes is low and those on your credit cards are high in order to make up for losses suffered by the issuers. For your information, the issuers (banks) profit margin is really only about 3.4% on average, just in case you missed it when the President spoke of fat-cat bankers.  Compare this to the national average of all business, which is about 17%.  So any and all losses need to be VERY closely watched.  It makes sense (even though we don’t like it) when you see it in the context of truth and not political hyperbole.

I am literally in the business of helping people deal with their debt, including credit cards, but the way I see it, the easiest way to control debt is to help those in trouble work their way out of it a quickly as possible.  After all, interest rates are not a problem on zero balances, but I fully recognize that as a last resort, credit cards can provide a vital cushion in the case of unexpected job loss or illness while the family gets back on track.  In an economy with homes underwater, no equity to borrow against and savings at an all-time low, without access to credit, millions of people will have to end up resorting to risky or un-reputable lenders.

So what is Congress’ answer to all of this? They intend to move up the effective date to take effect on December 1st.  Not a great idea! The end result will be to just compound the impending issues faced by this legislation as well as hasten the turning-off of credit for millions.   Please Congress, try again. This idea, like our credit card, has been “declined”.