Congress Debates Credit Cards, and Credit Vs. Debit

According to today’s Washington Post, Congress is currently considering new rules that will reign in credit card companies. The problem is that companies will enormously jack up interest rates in a predatory matter. Combine that with the new, horribly revised bankruptcy law of 2005, and you have recipe for credit card companies forcing people into bankruptcy. According to the article: “Under current law, people filing for chapters 7 and 13 bankruptcy protection are obligated to pay credit card balances along with secured debts, such as house and auto loans.” What’s even worse, is that credit card debt is actually prioritized above child support payments!

What Will This Proposed Law Do?

This bill would cap the interest rates at which credit card companies may charge consumers at 15% plus the current yield on the 30-year Treasury bond. That combined rate is currently 18.5% . Any banks that charge interest rates beyond that would not be eligible to recover that debt when a person declares bankruptcy. The intended effect would be to give consumers leverage in negotiating lower rates with their credit card companies. Currently, it is in a credit card company’s interest to raise rates as high as possible, especially when they do not feel that a card holder is able to pay their balance, such as when someone looses their job. In that way, they can rack up as much debt as possible before the person declares bankruptcy. In many cases, it becomes a self fulfilling prophecy as the higher rates force people into bankruptcy, and the courts protect the debt to the banks.

This bill would discourage banks from forcing people into bankruptcy, partially neutering the egregious 2005 bankruptcy act.

What Do The Banks Say?

The bank’s response to every possible change in the status quo, or failure to enact legislation that they favor is always the same. “If you don’t do what we want, we will have to restrict credit, and raise interest rates and fees. Ultimately the consumer will lose if you don’t do what we want.” They said this in regards to the proposed credit card bill of rights, and the eventual new rules.

Excuse me for being just a little bit skeptical that the credit card issuing banks have our best interest in mind. With the credit card companies, the sky is always falling. Frankly, I don’t think people are scared, as these companies already do everything they can to legally scam people, it is hard to imagine laws restraining them actually making it worse. As Senator Sheldon Whitehouse accurately noted: “The standard credit card agreement gives the lender the power to bleed their customer through evolving and ever more crafty tricks and traps, under this business model, the lender focuses on squeezing out as much revenue as possible in penalty rates and fees, pushing the customer closer and closer to the edge of bankruptcy.”

Credit Cards Vs. Debit Cards

The Consumerist today has a post about how banks are trying to get you to use your debit card like a credit card. According to the post, Chase in particular is pulling out all of the stops to get people to choose credit when offered the choice of credit or debit. Note, this is only when using a debit card. The result is always the same, that the money is taken out of your balance immediately, whether or not you choose credit or debit. The difference, from Chase’s perspective, is that they get much higher fees from signature authorized debit transactions.

In my research, I have found that some of their reward debit cards offer higher rewards for such “signature authorized” transactions. Take for example the Chase/Continental Airlines debit card. They offer 1 mile per dollar only on “qualifying transactions”. What qualifies? According to their web site:

“Qualifying purchases include all debit card purchases made without using a PIN. Such “non-PIN” purchases include purchases you sign for, Internet purchases, phone or mail-order purchases, [and] small dollar purchases that do not require a signature, bill payments.”

It is a good bet that these are exactly the types of transactions that cost the merchant higher fees. Lost in Consumerist’s blub are the key differences between debit and credit cards for those who pay off their balance in full:

1. With a credit card, I get a free float until my statement due date. I keep that in mind sometimes when I make a large purchase right after my statement closing date, giving me 50 days of free interest.

2. With a credit card, I get a host of protections, the most important of which is charge back power if a merchant doesn’t deliver. With a debit card, outright fraud is the only way you might get your money back.

3. Lots of perks. For an extreme example, see Mr. Credit Cards recent review of the vaunted American Express Platinum Card.

The real question is not whether choose debit or credit when using your debit card, it is why are you using it in the first place?