The Atlantic Home

I just got a press release from the Senate Banking Committee saying that Chairman Christopher Dodd (D-CT) is introducing legislation that would immediately freeze credit card rates on existing balances. Last spring, Congress passed credit card regulation, which prevents banks from arbitrarily raising interest rates. Those rules, however, aren't in full effect until July 2010. As a result, card companies have been using the time cushion provided to jack up interest rates. Such a reaction should be surprising to no one, but the practice of card companies changing rates during this transition period should be permitted.

Here's the official line, via Dodd:

"We worked long and hard to enact the safeguards included in the Credit CARD Act," said Dodd, who had introduced the bill in 2004, 2005 and 2008 before successfully passing it this spring. "And no sooner had it been signed into law, but credit card companies were looking for ways to get around the protections this Congress and the American people demanded. This bill would end those abuses and further protect customers today."

Right, but what's being done here isn't a matter of the financial industry "working around" the laws that will be in effect -- it's preparing for them.

Now listen: I'm always the first to admit that there are some seriously shady credit card companies and practices out there. I've seen them first-hand, as a consumer, banker and consultant. But I'd also argue that credit card companies raising interest rates in light of this year's regulatory changes aren't as shady as Dodd and most consumers probably assume.

Maybe this will help: Imagine that you're playing the board game Monopoly. Normally, the way the game works is that you must have a "monopoly" of properties of the same color before you can buy houses or hotels allowing you to charge other players more money if they land on your properties. But suddenly, everyone playing decides to change the rules, so that you can now buy houses and hotels even if you don't have a monopoly of properties. Would you still wait to hold all of the properties of the same color before buying houses and hotels? I wouldn't. Neither would credit card companies.

Similarly, last spring Congress changed the rules of the game. As a result, credit card companies had to completely reconfigure their profit strategies -- just like you would have had to in the Monopoly example. Since they couldn't raise interest rates as arbitrarily, they deemed the best solution was to raise them across the board. That way, a broader revenue base would make up for the money they lose by having less flexibility.

Most people probably don't like this move. Others might say it's downright mean. But it's fully rational to shift strategy when someone changes the rules of the game, as my Monopoly example attempted to demonstrate. Whether people like it or not, credit card companies intend to continue making money.

The reality is that Congress and angry consumers don't really seek "fairer" laws for credit card companies: they seek credit card companies that make less profit. Raising card interest rates across the board is actually quite fair -- all consumers lose. As a result, the only thing that would have really satisfied people like Dodd is something like a windfall tax on credit card companies, or interest rate and fee ceilings. It's telling how Congress' true feelings come out once their roundabout way of trying to curb card companies' profit fails.

So what happens if Dodd's new bill succeeds? Simple: card companies will shift their strategy again, as the rules will have changed once more. This time, if they wanted to raise rates on riskier consumers but can't, then they'll just close those accounts instead. That will probably trigger more anger by Congress, which will perhaps urge them to prohibit card companies from closing accounts. And the cat and mouse game between Washington and the financial industry can continue.