Credit Card Companies: Mean vs. Evil

I love getting all these comments on my credit card piece from earlier, even if many disagree with my argument. So let me elaborate: I'll be the first to agree that some credit card companies play some despicable games and need some reform.

I could tell you stories about some card companies I visited when I was a banker and consultant that would make your skin crawl. I once had my own problems with American Express acting extremely shady (which is why I will never use one of their cards again - that's my power as a consumer). As a result, I fully agree that deceptive practices should be forbidden. I did not mean to imply otherwise. I believe many of the provisions having been suggested are good, especially those that require better disclosure. I just worry some go too far and will make credit cards harder to get and more expensive.

First, don't forget that the credit that we're talking about is unsecured. It's not like an auto loan where you can repossess the car or a mortgage where you can foreclose. Chances are, if you decide not to pay a credit card balance, the card company will end up taking a substantial loss on it - more substantial than it would take with a secured loan.

Because of that high risk involved, it's important for credit card companies to be able to dynamically alter their terms and conditions, or else their risk models won't be able to accurately protect the money they lend. Without that dynamic nature, they will have to treat the credit line as a loan for the full value of the line, just in case. That will result in higher rates and more fees in general, since they need greater protection. Is that preferable? Maybe to some, but probably not to people who pay their bill every month.

My chief concern, and point, was to explain that by trying to make credit card laws "fairer," Congress will merely price many borrowers with poor credit out of the market. I believe that those borrowers should have the option of receiving a credit card if they qualify for one with more aggressive policies - so long as they know what they're getting themselves into. (So yes, more transparency is important and desirable.) Otherwise, the card companies simply won't be able to afford to do business with them. This is particularly problematic for consumers with bad credit who want to improve their credit going forward, which having a credit card with aggressive terms would eventually help with if they use it responsibly.

One final note: the ultimate power has always lied in the hands of consumers, who can simply choose not to use credit cards if they don't like their practices. That's how a free market works - eventually companies will have to change their practices if they want your business.