Credit Card Fees

It's a dirty little secret that banks make a lot of money on their worst credits. Bad credits tend to be desperate or cognitively challenged, making them good customers. But there is competition for these saps, and banks are profit maximizing, so they set prices such that the spread, loss, and volume is optimized. Thus, one can expect any regulation that caps prices to lower volume and profits.

Congress and the President are hot to get some good PR by limiting the ability of credit card companies to add fees and whatnot. Minor stuff in the scheme of things. Here in Minnesota, there is a proposed 30% corporate surcharge on all revenue from interest rates over 15%. That sounds like a nightmare to administer, and I don't know if that means they follow the profits of all payments from individuals to their various companies around the globe, just apply it to Minnesota based companies, or how they plan to determine earnings on a single line of business within a large diverse financial organization (it's a surcharge on earnings, not revenue). Hey, it's popular, worry about details later. But all this will do is lower the amount of credit extended to these people, and probably raise their overall lending costs. If you think their spending is like buying cigarettes, that's a good thing. I'm actually quite shocked by the amount of debt most poor people have, and think they would be wise to borrow less.

In sum, it does not amount to much, but protecting people from themselves is never easy. There are alternatives, and if credit card debt becomes overly regulated, then pay-day loans, or rent-to-own, will gain market share, and it's not clear the poor win. The bottom line is that it is hard to protect someone from their own poor judgment, and it just gets harder the further away one gets from the person. Credit is fungible, coming in various conditions and services. Unfortunately, regulations to protect consumers tends to merely overwhelm them with information. For instance, even in 2006 during the height of the mortgages lending bubble, a mortgage document would take about 15 different initials on various pages of 10 point font documentation that borrowers did not read. Anything that aims on informing desperate or stupid people on how much they are paying should focus more on prioritization of information disclosure, not the absolute amount. Investment professionals would benefit from greater disclosure about financial balance sheets, because there are relatively few analysts but they have the ability and willingness to check this out. You average borrower's eyes glaze over when faced with page and page of disclosures. Know your audience, legislators.