Congress Should Tread Lightly in Implementing Credit Card Reform

Yesterday, President Obama urged Congress to pass credit-card reform legislation by Memorial Day. In his weekly address, he stated, “There is no time for delay…We need a durable and successful flow of credit in our economy, but we can’t tolerate profits that depend upon misleading working families.”

The House passed the Credit Cardholders’ Bill of Rights back in April. Under the legislation:

“Card companies will no longer be able to retroactively raise the interest rate on existing balances–except under limited circumstances, such as a 30-day delinquency. When the credit card companies do increase an interest rate, they will be required to give customers 45 days’ notice. In addition, interest may only be tallied on balances in the current billing cycle, statements will be mailed earlier in the billing cycle, payments will always be allocated to the portion of the balance with the highest interest rate, and hefty fees for over-limit transactions will be banned unless cardholders explicitly permit it ahead of time.”

The bill is now back in the Senate’s hands where it awaits action, and the President intends to campaign for the reform at a townhall forum in New Mexico this week.

Our current crisis is a crisis of confidence by both consumers and lenders. When regulating the extension of credit, our Congress must be mindful of the potential unintended consequences that could result from this kind of reform. This administration has gone to great lengths to get credit flowing and to encourage consumer spending. Regulating the credit card industry could very easily result in a drawing down of credit lines — negatively impacting consumer spending despite its good intentions. Erecting obstacles to the extension of credit is no way to get yourself out of a credit crunch.

*Originally published May 10, 2009 on the American Issues Project Blog, here.

Tags: credit card reform, Credit Crisis