Credit card cheques will be banned as part of government plans for consumer protection due to be unveiled.
Measures to assist people facing difficulties with debt and at risk from rogue traders during the recession are also expected to be announced.
Figures from the Bank of England show that UK residents owe £233bn on credit cards, overdrafts and other loans.
The government will unveil its plans - to be laid out in a White Paper - at 0930 BST.
Credit cards
The government could propose action to make lending practices more responsible, with concerns raised about debt levels during the recession.
Research from the price comparison website, Uswitch, suggested one in five people saw their credit card limit increased over the last 12 months without them asking for it.
Consumer groups have also called for more help for consumers to resolve issues with businesses which they believe have ripped them off.
Citizens Advice wants a Consumer Ombudsman who would resolve individual's complaints and take command of group action by consumers.
Wednesday, 1 July 2009
Tuesday, 30 June 2009
Consumer Financial Product Commission Distracts from Real Reform
Today the Obama Administration released a 152-page draft bill to create a new Consumer Financial Product Commission. While intended to protect against consumer confusion and reduce the likelihood of future financial crises, the proposed agency will at best have little impact and at worst contribute to the next financial crisis, with the added effect of decreased homeownership and increased litigation.
The president promises that “those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past,” The president ignores that those “ridiculous contracts” and “fine print” are the result of previous rounds of so-called consumer protections. The disclosures one receives with a mortgage or a credit card are those mandated by some level of government. They don’t call those credit card disclosures a “Schumer Box” because they were invented by a baron of industry. In addition to the government-mandated disclosures that have failed, are the endless amount of fine print added to protect companies from frivolous litigation. The Obama approach to that problem is to increase the amount of litigation.
If the president were serious about avoiding the next housing bubble and financial crisis, he would propose eliminating some of the various federal policies that contributed to the housing bubble. For instance, how about requiring real down payments when the taxpayer is on the hook – as with Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). Talk about bad incentives; under FHA, a borrower can put almost nothing down and if the loan goes bad, the government covers the lender for 100 percent of their losses. No wonder we had a housing bubble. In addition, the proposed agency does nothing to address the underlying causes of any type of credit default: unemployment, unexpected health care costs or divorce.
Once again, when given the opportunity to address the real flaws in our financial system, the administration chooses to appease the special interests and provide a distraction from the underlying causes of our current financial crisis.
The president promises that “those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past,” The president ignores that those “ridiculous contracts” and “fine print” are the result of previous rounds of so-called consumer protections. The disclosures one receives with a mortgage or a credit card are those mandated by some level of government. They don’t call those credit card disclosures a “Schumer Box” because they were invented by a baron of industry. In addition to the government-mandated disclosures that have failed, are the endless amount of fine print added to protect companies from frivolous litigation. The Obama approach to that problem is to increase the amount of litigation.
If the president were serious about avoiding the next housing bubble and financial crisis, he would propose eliminating some of the various federal policies that contributed to the housing bubble. For instance, how about requiring real down payments when the taxpayer is on the hook – as with Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). Talk about bad incentives; under FHA, a borrower can put almost nothing down and if the loan goes bad, the government covers the lender for 100 percent of their losses. No wonder we had a housing bubble. In addition, the proposed agency does nothing to address the underlying causes of any type of credit default: unemployment, unexpected health care costs or divorce.
Once again, when given the opportunity to address the real flaws in our financial system, the administration chooses to appease the special interests and provide a distraction from the underlying causes of our current financial crisis.
Friday, 22 May 2009
US credit card firms clamp down
President Barack Obama has signed into law extensive new restrictions on the ability of US credit card companies to charge fees or raise interest rates.
"With this bill we are putting in place some common sense reforms designed to protect consumers," he said.
The bill is designed to protect credit card users from unexpected fees or increases to their interest rates.
Some of the major US banks have warned the changes may reduce the amount of credit available to some card holders.
They say this is because the new rules will make it more difficult for them to set rates based on the risk customers pose.
Americans currently owe nearly $1 trillion (£630bn) on their credit cards.
"This cements a victory for every American consumer who has ever suffered at the hands of the credit card industry," said Senator Christopher Dodd, chairman of the Senate banking committee.
The US government has been concerned to tighten its regulation of the banking system in the light of the credit crunch and banking crisis.
Big changes
The new law, described as a credit card holder "Bill of Rights", is the first of a series of law changes designed to help stave off further financial crises.
Among the main provisions of the new law are ones that:
- stop arbitrary interest rate increases and "universal default" on existing balances. In universal default, a lender can change a cardholder's account to costly "default" terms from normal terms when the lender learns the cardholder missed a payment on an account with another lender, even if the cardholder has not defaulted with the first lender
- stop card issuers from raising rates for a cardholder in the first year after an account is opened, and require that promotional rates must last at least six months
- stop issuers from charging fees for spending beyond their limits, unless the cardholder chooses to allow the issuer to process the excess spending, and restrict any "over-limit" fees
- require penalty fees to be reasonable and proportional to the cardholder's omission or violation
- require that cardholders be told how long it would take, and the interest cost involved, in paying off a card balance if they make only the minimum monthly payments
- require that cardholders must get 45 days' notice of interest rate, fee and finance charge increases
Backing off
One important exception to the new restrictions on rate changes are people who are one month or more behind with their repayments.
US borrowers in this position will continue to run the risk that their card issuer can decide they are now a bad risk and levy a higher interest rate.
"We will watch to see how the situation in the US develops," said Sandra Quinn of the UK card association Apacs.
"Many of the new US policies already exist in the UK under the Banking Code and have done for four years," she said.
In March, the UK government said it would bring in legislation to stop card firms from raising the credit limit of customers who had not asked for it.
It also wants to ban firms from sending out unsolicited credit card cheques to their customers.
In December, the credit card industry gave in to government pressure and agreed a new set of "fair principles" which would see card companies backing off from raising interest rates when customers fall into arrears on their payments.
"We continue to talk regularly to consumer groups and the credit card industry and these discussions, along with proposals to provide further help to people in difficulty with their finances, will be reflected in the forthcoming Consumer White Paper," said the Consumer Affairs Minister, Gareth Thomas.
"With this bill we are putting in place some common sense reforms designed to protect consumers," he said.
The bill is designed to protect credit card users from unexpected fees or increases to their interest rates.
Some of the major US banks have warned the changes may reduce the amount of credit available to some card holders.
They say this is because the new rules will make it more difficult for them to set rates based on the risk customers pose.
Americans currently owe nearly $1 trillion (£630bn) on their credit cards.
"This cements a victory for every American consumer who has ever suffered at the hands of the credit card industry," said Senator Christopher Dodd, chairman of the Senate banking committee.
The US government has been concerned to tighten its regulation of the banking system in the light of the credit crunch and banking crisis.
Big changes
The new law, described as a credit card holder "Bill of Rights", is the first of a series of law changes designed to help stave off further financial crises.
Among the main provisions of the new law are ones that:
- stop arbitrary interest rate increases and "universal default" on existing balances. In universal default, a lender can change a cardholder's account to costly "default" terms from normal terms when the lender learns the cardholder missed a payment on an account with another lender, even if the cardholder has not defaulted with the first lender
- stop card issuers from raising rates for a cardholder in the first year after an account is opened, and require that promotional rates must last at least six months
- stop issuers from charging fees for spending beyond their limits, unless the cardholder chooses to allow the issuer to process the excess spending, and restrict any "over-limit" fees
- require penalty fees to be reasonable and proportional to the cardholder's omission or violation
- require that cardholders be told how long it would take, and the interest cost involved, in paying off a card balance if they make only the minimum monthly payments
- require that cardholders must get 45 days' notice of interest rate, fee and finance charge increases
Backing off
One important exception to the new restrictions on rate changes are people who are one month or more behind with their repayments.
US borrowers in this position will continue to run the risk that their card issuer can decide they are now a bad risk and levy a higher interest rate.
"We will watch to see how the situation in the US develops," said Sandra Quinn of the UK card association Apacs.
"Many of the new US policies already exist in the UK under the Banking Code and have done for four years," she said.
In March, the UK government said it would bring in legislation to stop card firms from raising the credit limit of customers who had not asked for it.
It also wants to ban firms from sending out unsolicited credit card cheques to their customers.
In December, the credit card industry gave in to government pressure and agreed a new set of "fair principles" which would see card companies backing off from raising interest rates when customers fall into arrears on their payments.
"We continue to talk regularly to consumer groups and the credit card industry and these discussions, along with proposals to provide further help to people in difficulty with their finances, will be reflected in the forthcoming Consumer White Paper," said the Consumer Affairs Minister, Gareth Thomas.
Tuesday, 12 May 2009
The Real Problem with Credit Cards: The Cardholders
The problem with the credit-card industry isn't just the credit-card companies — it's you, too. This week the Senate takes up a bill that would seriously clamp down on some of the industry's most unsavory practices, a piece of legislation that President Obama has said he wants on his desk by the end of the month. The bill, which builds on rules issued by the Federal Reserve Board and other agencies at the end of last year, would do away with interest-rate hikes on existing balances, prohibit issuers from putting customer payments toward lower-rate balances first and abolish the practice of raising a customer's interest rate because he was late paying a bill to someone else.
The credit-card companies, though, may not be the only ones we need to be protected from. Every penny of Americans' nearly $1 trillion in revolving debt started with someone — some individual person — whipping out a piece of plastic and making a decision to use it. We could consider that free will and just call it a day, but there's plenty of reason to believe the story isn't so simple. There are piles of evidence that people are bad decision-makers when it comes to how they use credit cards. Even when presented with full and fair information, they often make decisions not in their own economic best interest — a reality only partly taken into account by the new rules and pending legislation. (Read a brief history of credit cards.)
Consider the teaser rate. More than a third of consumers pick one credit card over another based on which issuer has the lowest introductory interest rate. And yet people often do so in a way that they wind up with higher finance charges over time. In one study, University of Maryland economists Haiyan Shui and Lawrence Ausubel watched people pick a card with a teaser rate of 4.9% for six months over a card with a teaser rate of 7.9% for 12 months. That would make sense if people then paid off their balances within six months. But many didn't — the average balance for the year was $2,500, with plenty of folks paying more in interest charges than they would have had they opted for the other card, considering the rates on each spiked to 16%.
It is easy to chalk that up to simple human carelessness. Certain economists, though, have another way of looking at that and similar findings. They see a systematic psychological breakdown — as a species we're just really bad at understanding costs that come later on. Instead, we assign a disproportionate amount of importance to what's immediate and tangible. We lock eyes with that initial low rate and can't look away. (And, yes, the credit-card companies get that.)
It's the same thing with that laundry-list of fees that come with cards. We think that we're not going to be the ones to go over our credit limit or miss a payment and trigger a penalty rate, so we give those fees little to no weight as we're deciding which card to sign up for — even though they eventually make a big difference in what we pay. "We don't tend to take into account future costs," says Oren Bar-Gill, a law professor at New York University who has studied credit-card contracts and customer behavior. "Consumers don't really know how much they're paying for their credit card."
Once we've got our card in hand, our behavior becomes riddled with irrationalities. In one experiment, Drazen Prelec and Duncan Simester of the Massachusetts Institute of Technology found that people were willing to pay twice as much for basketball tickets when they were using a credit card as opposed to paying cash. Credit-card spending just doesn't feel like real money. In another study, Nicholas Souleles of the University of Pennsylvania and David Gross of the consultancy Compass Lexecon calculated that the typical consumer unnecessarily spends $200 a year in interest payments by keeping a sizeable stash of cash in savings or checking while at the same time carrying a credit-card balance. In our heads, the two just don't line up.
The seeming solution would be to make clear to consumers exactly how much their credit cards are costing them. In fact, over the past few decades, there has been a massive push in that direction, from the Truth in Lending Act to the 'Schumer Box,' which gives a one-page summary of credit-card terms in a font size dictated by the federal government — it needs to be large enough to catch your attention. Credit-card statements that were a page long in the early 1980s now easily run to 30. That's a lot of information. And yet America's overreliance on consumer debt has happened anyway. Why? Disclosure itself may simply not be enough considering the well-entrenched forms of human thinking we're dealing with. "There have been a lot of disclosure policies over the past 20 years, but they've had a limited effect on improving the market," says the University of Maryland's Ausubel. "The problem isn't in the availability of information. The problem is in the processing of the information." (Read "How the Banks Plan to Limit Credit-Card Protections.")
What we need to do, that argument continues, is to frame information about how much credit cards cost in a way that really drives the point home. In 2007, a group of Senators introduced a bill that would have required credit-card companies to say, on each billing statement, how long it would take a person to pay off his balance, and how much it would cost in principal and interest should he only make the minimum required payment each month. (That's another psychological trip-up: having a low minimum payment printed on the statement in a big font ratchets down our perception of how much we should be paying off, meaning we carry higher balances for longer.) That bill never went anywhere, but a similar provision is in the bill currently before the Senate.
The difference is that we'd not just be telling people about a particular credit card's characteristics, but about what those characteristics mean in terms of our actual, human behavior. It would be similar to Federal Trade Commission rules that require auto manufacturers to say how many miles per gallon cars get whether a person is driving in the city or in the country. Depending on a person's behavior, the cost changes — and that's made clear right on the sticker.
Economist Richard Thaler and legal scholar Cass Sunstein, who now heads the White House Office of Information and Regulatory Affairs, think we should go even further. In their book Nudge, they sketch a system in which each year credit-card companies would be required to break out all the fees, interest and other charges customers paid over the past 12 months. That information would come on a person's statement, and electronically, too, for easier comparison shopping. "By knowing their precise usage and fee payments, customers would get a better sense of what they are paying for," write Thaler and Sunstein. Ostensibly, people would then spend more reasonably. When a new sofa goes from costing $500 to $700 — and the pricing is transparent enough for people to realize that — fewer buy it.
The beauty with that sort of system is that it doesn't impose more heavy-handed rules on people who don't need them. After all, 42% of households with credit cards pay off their bills in full each month — some people get caught up in the psychology of credit cards more than others. Telling people the cost of using their credit cards, in a way they understand and internalize, levels the playing field and then lets each person make an informed, unhindered decision for himself.
The credit-card companies, though, may not be the only ones we need to be protected from. Every penny of Americans' nearly $1 trillion in revolving debt started with someone — some individual person — whipping out a piece of plastic and making a decision to use it. We could consider that free will and just call it a day, but there's plenty of reason to believe the story isn't so simple. There are piles of evidence that people are bad decision-makers when it comes to how they use credit cards. Even when presented with full and fair information, they often make decisions not in their own economic best interest — a reality only partly taken into account by the new rules and pending legislation. (Read a brief history of credit cards.)
Consider the teaser rate. More than a third of consumers pick one credit card over another based on which issuer has the lowest introductory interest rate. And yet people often do so in a way that they wind up with higher finance charges over time. In one study, University of Maryland economists Haiyan Shui and Lawrence Ausubel watched people pick a card with a teaser rate of 4.9% for six months over a card with a teaser rate of 7.9% for 12 months. That would make sense if people then paid off their balances within six months. But many didn't — the average balance for the year was $2,500, with plenty of folks paying more in interest charges than they would have had they opted for the other card, considering the rates on each spiked to 16%.
It is easy to chalk that up to simple human carelessness. Certain economists, though, have another way of looking at that and similar findings. They see a systematic psychological breakdown — as a species we're just really bad at understanding costs that come later on. Instead, we assign a disproportionate amount of importance to what's immediate and tangible. We lock eyes with that initial low rate and can't look away. (And, yes, the credit-card companies get that.)
It's the same thing with that laundry-list of fees that come with cards. We think that we're not going to be the ones to go over our credit limit or miss a payment and trigger a penalty rate, so we give those fees little to no weight as we're deciding which card to sign up for — even though they eventually make a big difference in what we pay. "We don't tend to take into account future costs," says Oren Bar-Gill, a law professor at New York University who has studied credit-card contracts and customer behavior. "Consumers don't really know how much they're paying for their credit card."
Once we've got our card in hand, our behavior becomes riddled with irrationalities. In one experiment, Drazen Prelec and Duncan Simester of the Massachusetts Institute of Technology found that people were willing to pay twice as much for basketball tickets when they were using a credit card as opposed to paying cash. Credit-card spending just doesn't feel like real money. In another study, Nicholas Souleles of the University of Pennsylvania and David Gross of the consultancy Compass Lexecon calculated that the typical consumer unnecessarily spends $200 a year in interest payments by keeping a sizeable stash of cash in savings or checking while at the same time carrying a credit-card balance. In our heads, the two just don't line up.
The seeming solution would be to make clear to consumers exactly how much their credit cards are costing them. In fact, over the past few decades, there has been a massive push in that direction, from the Truth in Lending Act to the 'Schumer Box,' which gives a one-page summary of credit-card terms in a font size dictated by the federal government — it needs to be large enough to catch your attention. Credit-card statements that were a page long in the early 1980s now easily run to 30. That's a lot of information. And yet America's overreliance on consumer debt has happened anyway. Why? Disclosure itself may simply not be enough considering the well-entrenched forms of human thinking we're dealing with. "There have been a lot of disclosure policies over the past 20 years, but they've had a limited effect on improving the market," says the University of Maryland's Ausubel. "The problem isn't in the availability of information. The problem is in the processing of the information." (Read "How the Banks Plan to Limit Credit-Card Protections.")
What we need to do, that argument continues, is to frame information about how much credit cards cost in a way that really drives the point home. In 2007, a group of Senators introduced a bill that would have required credit-card companies to say, on each billing statement, how long it would take a person to pay off his balance, and how much it would cost in principal and interest should he only make the minimum required payment each month. (That's another psychological trip-up: having a low minimum payment printed on the statement in a big font ratchets down our perception of how much we should be paying off, meaning we carry higher balances for longer.) That bill never went anywhere, but a similar provision is in the bill currently before the Senate.
The difference is that we'd not just be telling people about a particular credit card's characteristics, but about what those characteristics mean in terms of our actual, human behavior. It would be similar to Federal Trade Commission rules that require auto manufacturers to say how many miles per gallon cars get whether a person is driving in the city or in the country. Depending on a person's behavior, the cost changes — and that's made clear right on the sticker.
Economist Richard Thaler and legal scholar Cass Sunstein, who now heads the White House Office of Information and Regulatory Affairs, think we should go even further. In their book Nudge, they sketch a system in which each year credit-card companies would be required to break out all the fees, interest and other charges customers paid over the past 12 months. That information would come on a person's statement, and electronically, too, for easier comparison shopping. "By knowing their precise usage and fee payments, customers would get a better sense of what they are paying for," write Thaler and Sunstein. Ostensibly, people would then spend more reasonably. When a new sofa goes from costing $500 to $700 — and the pricing is transparent enough for people to realize that — fewer buy it.
The beauty with that sort of system is that it doesn't impose more heavy-handed rules on people who don't need them. After all, 42% of households with credit cards pay off their bills in full each month — some people get caught up in the psychology of credit cards more than others. Telling people the cost of using their credit cards, in a way they understand and internalize, levels the playing field and then lets each person make an informed, unhindered decision for himself.
Subscribe to:
Posts (Atom)
