Credit Card Legislation

Well, a new bill is blazing through Congress, ensuring the government's hands will interfere once again with the free market. The bill has several "protections" for individuals that have credit cards, including notices for rate increases, mandatory cosignors for young adults, and a mandatory lower interest rate if the cardholder pays on time for 6 months.

As I was reading a few articles about this legislation, I came across this passage in an Associated Press article:

"Senate Banking Committee Chairman Christopher Dodd, D-Dem., on Wednesday brushed aside talk that credit will be more scarce if Congress approves the bill...

...Dodd said any assertion that credit will be hard to get is absurd, "a little like Chicken Little.""

Go ahead and reread it again.

I am going to give a hypothetical example as to why Dodd's statement is absolutely riduculous. Let's say 2 friends wanted to borrow money from you. One friend has worked every day of his life, has paid off his house and car, and has always done what he said he would do for as long as you have known him. You agree to lend him the money at a 4% interest rate, because you are absolutely confident he will pay you back promptly and with no collection effort on your part.

Now let's say your other friend needs money as well. However, this friend has never held a job for more that 3 months in a row, and goes through several months of unemployement between jobs. He is late on his mortgage payments, and his car loan is twice the amount his car is worth. In the past when you lent him money, you had to send letters 3 times a month and call 6 times before a payment would show up. Would you lend him money? The answer should be, YES, as long as you are getting paid a sufficient amount for the risk you are taking. So you loan the money to him at a 50% interest rate.

Now let's say the government restricts the maximum amount that you can charge to 20%. How would your decisions change? Most likely, when your jobless friend asks you for a loan, you would have to tell him NO, because the government is restricting how much you can get paid for your effort. It simply is not worth it to you to take on the risk for a mere 20%.

Senator Dodd's statements that it won't be any harder to get credit is just flat wrong. If companies cannot make enough money to take risks, they won't take the risk.