REVIEW & OUTLOOK (Editorial): Plastic Posturing
How high is "too high" for credit card interest rates? The House Banking and Urban Affairs Committee took up this question last week before Congress broke for summer recess. Its verdict amounted to a split decision. It rejected a proposal by Rep. Frank Annunzio to cap credit rates at eight percentage points above the yield of one-year Treasury bills, while approving a measure requiring uniform disclosure of credit terms in solicitations and applications. (Currently, such disclosure is only required upon issuance of a credit card).</br></br>Despite the setback, the credit card cap likely will be offered to the full House when the disclosure bill comes to a floor vote after the recess. It amounts to legislative posturing. To the extent the cap has any effect at all it will simply create greater inconvenience for the majority of the nation's 75 million credit card users.</br></br>The most likely response by the industry to rate ceilings would be higher annual fees for some users, lower credit limits for others, and reduction or even elimination of grace periods on interest charges (which are now generally 25 days between the day of purchase and the day interest charges begin). Many if not most credit card users would come out worse for this trade-off.</br></br>The Annunzio amendment is modeled after laws on the books in about a dozen states that cap card interest rates. The experience of Arkansas, which boasts the most restrictive ceiling (pegged at 5% above the federal discount rate, meaning a current rate of 10.5%), is instructive. The biggest credit card casualties in Arkansas are lower- and lower-middle income households, according to a study by Purdue University's Credit Research Center. They are less likely to hold credit cards than their counterparts in ceilingless states. Moreover, Arkansas banks offer fewer credit card options than competitors in other states, and most importantly, no grace periods. The result is that half of the cards issued to Arkansas residents come from out-of-state banks.</br></br>On the face, interest rates on bank cards -- currently averaging nearly 19% -- appear high. But there is little evidence to show an absence in the credit card business of the competitive forces that set prices in other industries.