Credit Card Laws & Ethics

Credit cards: we love them, and we hate them. We love the convenience, but we hate the high interest rates. But really, based on our patterns of usage, it seems like the love/hate relationship is tilted in favour of love; it looks like our fondness for those super-convenient pieces of plastic is getting the better of us. The result: many North Americans are utterly buried under credit card debt. The natural temptation is to blame the banks, and certainly many financial institutions have preyed upon both our fondness of convenient purchasing, and our lack of attention to fine print, to turn credit cards into a cash cow.

But see this story, by Jennifer Liberto, for CNN Money: Credit card laws working, says bank critic

A year after new credit card laws curbed interest rate hikes and forced new disclosures, consumers are paying fewer late fees and have a better understanding of what their cards cost, according to a federal study released Tuesday.

White House official Elizabeth Warren, best known for her outspoken criticism of the banking industry, is expected to praise that same group during a Tuesday conference on the one-year anniversary of the credit card laws….

Now unless I’m mistaken, what banks are being force to disclose is stuff that would previously likely have been buried in the notorious ‘fine print’ of credit card agreements. And fine print is a hard problem, ethically. We all know that consumers should read the fine print; there can be important information there. But we also all know that almost nobody does read the fine print. Fairness requires at least some attention to what we can reasonably expect consumers to do. But on the other hand, is it really a bank’s fault if they disclose something important and you simply don’t bother to read it? While you could argue the fairness point back and forth, it’s also worth pointing out that there’s an economic efficiency argument here, too. Information asymmetries are the enemy of economic efficiency. (An “information situation” is any situations in which one party to a transaction understands that transaction much better than the other.) So we have here the foundation for an argument that says that, even if it is fair to expect consumers to read all the fine print, the fact that they do not do so is resulting in socially sub-optimal patterns of purchasing. This means a social reason, not just a paternalistic reason, to want to help consumers by forcing banks to change how it is that they disclose information.

The other interesting aspect of this story has to do with the persuasive force of law. According to Warren, “much of the industry has gone further than the law requires in curbing repricing and overlimit fees.” In other words, this may be a case in which the law not only prescribed a certain set of behaviours, but also set the tone for the industry. I think this aspect of law is too often overlooked. This suggests that even when we are skeptical about a new law because, for instance, we are skeptical about the potential for strict enforcement, we ought to consider the possibility that an industry will take the passage of a law as sending a signal about the overall tenor of society’s perspective on their business. We also ought to consider also the possibility that the law will give those subject to it an excuse to do what they thought they ought to be doing in the first place.

4 comments so far

  1. davidcoethica on

    I was thrown into this exact debate by a client recently.

    A local company ran by a man of good stead in the community wanted to create a business in the short term loan sector, but to do what the rest of the market had intentionally avoided, be open and honest. http://www.DoshShop.com isn’t a social enterprise but it is a good, honest and most of all fair, small business in a market that actively allows exploitation.

    It was interesting to watch the concept develop, in particular the reactions of those recently tarnished financial ‘institutions’ supplying certain services with inflated costs that DoshShop wanted to openly present to the purchasers. It wasn’t them asking for ridiculous fees but the suppliers wanted to hide their profiteering behind a veil of administration.

    I’m no fan of credit cards and have been stung personally but as individuals or economies we not going to rid ourselves any time soon. We can improve the quality of such debt by regulating openness and fairness

  2. Matthew Brophy on

    Credit cards, in my personal experience and analysis, trade on the fact consumers do not realize the meaning of the fine print. The “game” of credit cards, in fact, is to make it as difficult as possible for consumers to understand the rules. The credit card companies often change the rules, manipulate APRs, try to confuse consumers through various tactics in order to raise APRs, charge late fees, overdraft fees, and the like. Here are a list of the tactics that are the rule rather than exception:

    Bait and Switch – apply for a great credit card offer, but get inferior card.

    Spiked Interest Rates: from 7.9% to 29.9% APR

    Late Fee: $39 for even just a minute late

    Delayed Mail Delivery I – Address confusion – different PO Boxes

    Delayed Mail Delivery II – Exact time (not just the correct day)

    Over-the-Limit Tricks: Transfer balance for low APR advantage, find yourself over limit on new card

    Costly Cash Advances – Cash advance (checks in envelope) have a high APR oftentimes w/ no grace period to pay back

    Not So Fixed – Although called ‘fixed rate,’ can still raise your interest rate at any time. ‘Fixed’ (rather than ‘variable‘) rate means must give 15 days notice

    Half Forgiveness – late payment appealed, so no late penalty fee, but still raised interest rate

    Shifty Contracts: Constantly changing contracts with “opt-out clause” (15 days for “fixed-rates”)

    Transaction Fees (new!): Each transaction will cost you 4%, for example.

    Such tactics are intended to confuse and prey upon consumers. It’s not a matter of consumers just not “bothering” to read the fine print.

    The point of “efficiency” in this post is somewhat lost on me. A credit card company does not do itself a disservice by causing an entire industry to be “inefficient” as long as they themselves are profiting handsomely. Similarly, bribery causes market inefficency, but any argument via efficiency is lost on those advantaging their coffers from such bribery.

    In summary, I believe the portrayal of credit cards as simply complex loan products offered to consumers is to miss the spirit of such modern-day usury. Credit cards seek to prey upon the average consumer with overwrought fine print, shifting contracts, and underhanded tactics. The new regulations seek to curb such abuse. I only hope it effectively does so. However, I have my doubts.

    In closing, consider a new credit card, after the credit card act:

    The new card has $75 in fees and a $300 starting credit line. Not bad. BUT it also has a 79.9% purchase APR!
    Imagine owing, after a few years, $10,000 on this card, and paying $8,000 in interest per year, only to still owe $10,000! I’d rather borrow from a loan shark.

  3. Patricia burrows on

    question- trying to cancel credit card and not pay annual fee. statement says fee is for and charged in 2017, yet cc company says it was charged on 12/31/16 and last time i used card qas 12/31/16. thwy say its a valid charge and will not waive. do i have any recourse? i have not used card in 2017.

    • Chris MacDonald on

      Sorry, no idea. That’s a legal question, and I’m not a lawyer. Check with your local consumer protection agency.


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