We took your credit card reform questions to DC yesterday and interviewed Austan Goolsbee, senior economic adviser to President Obama. In part 1 of our 4-part series, we ask how are banks getting billions in bailouts and can turn around and cut off millions of credit cards and raise rates? How does it make sense that credit card companies can raise the interest rate on an existing balance? And, most importantly, why don’t we treat credit cards more like Canadians do cigarettes?
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EXTERIOR: WHITE HOUSE GATES
Ben: Hey Ben Popken here with Meghann Marco, Consumerist.com, we’re here at the White House—
Meghann:—invited to the White House—
Ben:—to talk credit card reform with Austan Goolsbee, senior economic adviser to Obama. We asked for your questions about credit card reform and we brought them here, so we’re gonna find out what’s in store for the future of plastic in America.
INTERIOR: CONFERENCE ROOM
Meg: So, as you know, we here at Consumerist, we make our living explaining the perils of the credit card industry to consumers, so why are you guys trying to put us out of business by reforming the credit card industry?
Austan: No no no, we’re trying to help you, that’s exactly, we’ve been listening to you for this long and it’s clear as the President said, there’s nothing wrong with a credit card industry where people can get access to credit, and people ought to pay their bills, but what we’ve gotten into is this situation where you’ve got some players engaging in clearly deceptive practices and predatory practices where consumers don’t have full information about what they’re getting themselves into, and where the industry’s made more than $15 billion in penalty fee income last year. So what they’ve done is just turned what use to be fees for penalties into really a profit center. And we’ve got to get away from a model like that.
Meg: So we’ve got a question from Consumerist reader Jason. He wants to know, why can banks be allowed to change APR on existing balances? Shouldn’t the new APR only be applied to the balances and purchases moving forward from the date of the change?
Austan: Yes, Jason’s totally right, that is one of the central elements in the Obama views, is that in a series of practices like changing the interest rate on money you already, loans you already took essentially, that it doesn’t make any sense, that we oughta get rid of that.
Ben: Along those lines, James Robrahn asks, “How’s it that the banks are getting billions in TARP funds and then they turn around and they’re cutting off people’s credit lines and raising interest rates in this time of crisis?” What’s going to be done about that?
Austan: When you’re in a crisis mode, it’s clear financial institutions are pulling in credit in all sorts of forms, that’s why the financial rescue was needed, it’s been a big effort of the administration, trying to get the lines of credit back flowing, to consumers, through credit cards, to small business, to a whole bunch of areas.
Ben: And what are some of those steps that are going to unlock credit for consumers?
Austan: Well a lot of the steps to unlock credit are more macro in nature, as I said, it would be relatively difficult to go legislate, for the government to go figure out, here’s a credit-worthy individual, you should go give them a loan, is much harder. So the things that they’re doing is we’ve go the financial rescue in place, we’ve had a series of efforts where the government’s trying to unlock consumer credit, student loan credit, automobile credit, small business credit, through the buying up of securitization, buying up various investments, which, they’ve tried to make it more appealing for people to get into that market. It has been met with some success, though we are certainly wanting to expand those markets now.
Ben: Up until now, basically, credit card companies have said, well we don’t regulation, we just need more disclosure. So, this is a new change of tactics. So I’m kind of wondering, you know, why don’t we take that up? why don’t we go with disclosure and do it like they do in Canada and cigarettes? You buy a box of cigarettes in Canada and you have a picture of a dessicated lung on the box and it says you smoke these and you will die. So with credit cards, you put a picture of a family evicted from their foreclosed house and it can say, if you use this improperly, it will lead to your financial ruin? Why doesn’t the administration push for something like that?
Austan: Meghann, is he Canadian?
Ben: Clearly. I’m Clearly Canadian.
Austan: The President totally agrees with the importance of disclosure, and disclosure and transparency. Which are related but not the same thing. I mean, I have a PhD in economics, I can’t understand a lot what’s in the contracts under your credit card, and my eyesight is not sufficient to even be able to read it a lot of the times. So, the President’s program is based on plain language, and reasonable disclosure. So disclosure plus transparency’s important… I don’t think that’s all the President’s fully on board with that’s all let’s do. I think he thinks we need that, but in addition, there are certain practices, that, even with disclosure, they’re relatively hard to explain, and the credit card companies have engaged in gaming the system so that they just need to be prohibited. So, setting your payment date to be on a Sunday, so that you literally can’t pay on the payment date, it either has to come in early or else it’s late and you get a penalty fee. Or setting the payment time to be noon, so even if it comes in but it came in in the afternoon oohp! You had a late fee, you add another 15 dollars. So there are a series of practices, be it the form of penalty fees, raising interest on loans you already took out, a variety of other things that the President thinks we need to do more than just disclosure and transparency.
Keep track of the entire 4-part series as it rolls out at consumerist.com/tag/interviews/goolsbee.
(Previous version of the post with all the comments here).