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Will new credit rules change behavior?

Marketplace Staff Feb 19, 2010

Will new credit rules change behavior?

Marketplace Staff Feb 19, 2010


Kai Ryssdal: We were talking a couple of minutes ago in the Wrap about real financial reform, and the likelihood thereof. Well to be honest, though, for all the talk of a crisis wasted, there has been at least one giant step taken toward tougher rules. Remember the credit card law that was passed last year? Most of its protections go into effect this coming Monday.

And here to give us the scoop is Tess Vigeland. She hosts our personal finance show, it’s called “Marketplace Money.” Hey Tess.

Tess Vigeland: Hello Kai.

Ryssdal: So you guys have done a lot about this new credit card law in the past, and a lot about it on the show that’s coming up this week. What are, quickly, the highlights?

Vigeland: Well, I think what the bulk of this legislation aims to do, Kai, is to cut down on some of the surprises that folks were getting in their statements. You know, open it up and SURPRISE! Your interest rate jumped from 11 percent to 30. Now that can still happen, but you have to be given 45 days notice before the new rate takes effect, and whatever new rate you have cannot be applied to things that you’ve already bought or existing balance.

There’s also the new warning label that will appear on your statement about what happens if you only make the minimum payment, how long it’s going to take you to pay off that card and how much you’re going to be giving the credit card company in interest.

Ryssdal: But, most of this stuff, Tess, it sort of seems to me only applies if you have what the experts call “credit behavior,” right? If you pay off the balances, then you’re fine.

Vigeland: Absolutely. And they’re making it harder on the people who used to be their very best customers, the folks who carry a balance — these are the people that credit card companies used to love because they were paying lots of interest. Now, yes, some people who do pay off every month have seen their credit lines cut, that’s a function of the companies trying to deal with risk. And yes, those folks have seen interest rate hikes, but who cares what your interest rate is, if you’re not paying any interest, right, paying off your balance?

Ryssdal: Yeah, absolutely. So what in this law, if anything, might actually change our behavior, get us to do something differently when we pull out the plastic?

Vigeland: Well, I’ve talked to a lot of folks about this, and one of them was financial historian John Steele Gordon. He says there are a couple pieces of the law that could actually prompt permanent changes in our behavior. He cited the new warning label as the primary example. He compared that to some of the food labeling laws in New York, where you can see calories and fat. He says maybe this will make people think twice about paying that minimum. But he believes that investors and consumers, in general, don’t learn lessons for the long term. On the other hand, a lot of economists will point out that it’s simply going to be tougher for people to get credit at all. So that could force us to change our behaviors.

Ryssdal: When you get letters from your listeners, I mean, you take a bunch of letters on your show and calls, what are they telling you about how they’re feeling about this thing? Is it going to do any good or not?

Vigeland: You know, Kai, we are getting hundreds of letters from folks who are so frustrated at all the changes the card companies made in the lead up to this law. They’re mad about those interest rate increases, credit lines being cut and a lot of folks are somewhat panicked, because they had really been thinking of these credit lines as their emergency fund.

There’s also concern about how these things are affecting credit scores. You know, if you go ahead and close an account, say “no” to a rate increase, it could affect your credit score. But you know, this is the new world of credit and for all the anger out there, two reminders: One, you don’t have a right to credit; it’s a business. They’re in business to make money off of you; they’re not your friend. Second, this country didn’t always live on credit, at least not as much as we do now. It’s a relatively new thing, and maybe it is time to go back to the old ways of living within our means.

Ryssdal: Everything you need to know about the new credit card law this weekend on our personal finance show. It’s called “Marketplace Money” and it is hosted by Tess Vigeland. Tess, thanks a lot.

Vigeland: My pleasure Kai.

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