TEXT OF INTERVIEW
Tess Vigeland: So we’ve spent a lot of time hearing how the new credit card legislation will affect you. But there’s another big group out there that’s experiencing major changes: The credit card issuers. Of course as we know, they’ve been preparing for this for months and adjusting their policies accordingly. But we thought it only fair to get their side of the story.
So we called up Scott Talbott. He’s with the Financial Services Roundtable, an organization that represents the banking industry. And he frankly surprised me with his answer to the question, “What do you think of the new laws?”
Scott Talbott: For the most part, we are entirely supportive of the reforms in this law. Our biggest concern with this bill or the effect of this bill, would be that it would have a downward pressure on the availability of credit, either through reducing credit lines or increasing interest rates. But overall, if you look at the provisions in the bill — from increased disclosures to predictability on your payment date to prohibiting marketing to students — this is actually a net benefit to consumers. In the end, everybody benefits from that.
Vigeland: Well, let’s go back to something you just said a moment ago. One of the things that we have been hearing is this argument that this law is going to make it more difficult for people to get credit. Can you walk us through exactly how that will happen? How will credit be more difficult to either maintain or obtain?
Talbott: Sure. Credit card lending is the riskiest type of lending. There’s not collateral; it can be fully discharged in bankruptcy. Terms for the credit are based on that risk. And so, any time the government steps and places controls over the ability of the market to price for that risk, the markets will respond by decreasing the availability of credit or increasing the interest rate, which has the net effect of decreasing the availability of credit.
Vigeland: But as far as I can see in the law, there’s nothing that says you can’t raise the interest rate, you just have to give someone a month-and-a-half notice.
Talbott: Well, no, the law actually prohibits you from increasing the interest rate on an existing balance, except for some very, very narrowly defined circumstances.
Vigeland: Right. But any balance going forward, you certainly can.
Talbott: Correct, for purchases going forward. But what we’re focused on here — and this is where our concern comes in — if you have a five or $10,000 balance at 10 percent interest rate, and you start missing payments, the law prohibits the industry from increasing the interest rate on that balance.
Vigeland: But what possible good would that do for the industry? I mean, if you’re increasing someone’s interest rate, and they’re already in arrears, how can that possibly mean that you’re going to get more money out of that stone?
Talbott: Well, what we’re doing is, the market is adjusting for the risk of that particular borrower. If the interest rate goes up, yes, it makes it harder for the consumer to pay that balance down. But at the same time, they’re still going to keep paying, they’re still going to try or at least we hope so, I mean, that’s the contract that they’ve signed. And so, if the interest rate reflects their increased risk, then their payments will respond accordingly, and they’ll end up paying more ultimately in interest. So, in the end, it’s not a good thing for the consumer necessarily, but by having the ability to price for risk, you allow the credit card market to operate efficiently.
Vigeland: I guess I still don’t understand — and I’ve never understood this, as this whole debate has gone along — this notion that you increase, by sometimes enormous amounts, the interest rate on an existing balance, as someone is falling behind on payments. That just makes it harder for them to pay it back. So how on earth does that benefit the credit card company?
Talbott: Well, there are those who will still be able to afford to make the payments, but you’re absolutely correct. It becomes a downward spiral; we recognize that and that is one of the challenges of credit card lending.
Vigeland: What do you say to — at the very least, hundreds, if not thousands of people out there, who have watched their credit card lines drop, their interest rates increase and yet, they say, “Look, I didn’t do anything wrong over the last nine months. Why punish me, when I’ve been a good credit risk?” What’s the answer to that?
Talbott: Sure, sure. Couple things: One, we are living in a recession, and there is a generalized risk in the economy, woven into everybody’s credit card rate is that generalized risk. Secondly, when you get an interest rate increase, you have the ability to challenge and refuse to pay that interest rate increase. And you will see that in the law that goes in effect on Monday. So, if you get an interest rate increase or a credit line decrease, contact your lender and see if you can negotiate a better rate or better terms. And if they are unwilling to negotiate, then vote with your feet. Go on-line and do your research. There are about 6,000 different credit card issuers out there.
Vigeland: And finally Scott, you know, it seems like the credit card industry has kind of become the bogey man, the new societal pariah, if you will. What’s it like to be the new folks that people love to hate?
Talbott: Well, couple things. One, we’re not used to being in the news, that is for sure. But that being said, there are some reforms that need to occur, and the industry is embracing them and will be ready on Monday to be compliant with the new law. And what we want to do is eliminate those bad practices and strengthen the good ones, so that credit cards are no longer the bogey man, but rather they’re an effective tool in your pocket and people feel comfortable using them, people feel comfortable carrying them.
Vigeland: Scott Talbott is with the Financial Services Roundtable, and we’ve talked about the new credit card laws coming into effect this coming Monday. Thanks so much for your time.
Talbott: Sure, my pleasure.
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