Credit Card Laws Won't End Consumer Exploitation

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James Kwak discusses the issue of credit cards and consumer exploitation.

From my personal perspective, credit cards are a lot better than twenty years ago, but that's because I pay no annual fee and I get rewards (cash back). This is pure reallocation of money, since all that has happened is that the interchange fees charged to merchants are now going to fund my rewards, and those interchange fees get passed on to consumers as higher prices. More generally, [Georgetown Professor Adam] Levitin says, the innovation has gone into more and more complex combinations of different price terms (teaser rate, long-term rate, ability to change rates, late fee, reward program, etc.) that simply make it harder for consumers to understand what they are paying.

My own perspective on credit cards was shaped by a classic article that appeared ten years ago in Fast Company Magazine, on Capital One.


A woman from Miami, who has called to find out if she has to pay her $39 annual fee every year, cheerfully signs up to pay $59.95 a year for Privacy Guard, a service that helps you check your credit report. "That's called a sale!" says [Capital One employee] Brannon. "That's called fattening your paycheck. Give me more calls!"

Esther from Connecticut, who had called to check her current interest rate, signs up to pay $59.99 for Capital One Edge, a program in which you receive a catalog of discounted merchandise as often as 12 times a year.

Carolyn from Illinois, whose credit history has won her a Visa with a $200 limit and a $59 annual fee, calls to find out how to get a cash advance. After answering that question, Brannon warns Carolyn that her Visa has less than $100 of credit available. Then she offers Privacy Guard to Carolyn. The cost: $59.95. "If you want to get your credit report, this is the way to do it," Brannon says. "This is what you need." (Actually, if your Visa has a $200 limit and a $59 annual fee, you don't really need a credit report.) Says Carolyn: "Yes, I would like to try that."

Many readers of the article were appalled by the consumer exploitation implicit in this data-driven marketing that seemed to impress the magazine.  I can certainly understand wanting to protect consumers from such exploitation.

My concern, however, is that ultimately consumers with low intelligence and low conscientiousness are inevitably going to be exploited.  If you remove one means of exploitation, another will arise.

With tighter credit card regulation, my guess is that credit card companies will stop exploiting some of the consumers with low intelligence and/or conscientiousness.  Instead, these consumers will be exploited by other lenders or by merchants.  But I doubt that legislation or regulation can stop the exploitation of such consumers altogether.

I would like to see a solution to the problem.  But I do not think it will come easily.

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Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.
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