Hello once again fellow Fools.
In my last blog post I wrote the following regarding the recent credit card legislation:
Want to make an unsecured loan? Sorry, Mr. Banker, you're not allowed to look at that borrower's credit score, history of defaults, banruptcies, or anything else that might tell you how risky a borrower that person is when deciding what interest rate to charge.
I wrote that as a reaction to the statement in the linked article (and others I'd read) that stated that credit card companies will be restricted from pricing credit for risk.
At the very least, my reaction was... hyperbole. If, indeed, the legislation prevented lenders from considering the factors above (which is what I, shooting from the hip, thought the articles meant), then I think my recation would have been warranted.
Thanks to the Fool who left a link to the text of the legislation. After sifting through the 'legalese' that I don't pretend to understand perfectly, I think I now know what the article's mention of restricting ability to price credit for risk was alluding to.
From the text of the legislation:
(1) IN GENERAL- Except as provided in subsection (b), no creditor may increase any annual percentage rate of interest applicable to the existing balance on a credit card account of the consumer under an open end credit plan.
There are certain exceptions to the above (for example, if the borrower is more than 30 days late on a payment) -- and the above does, indeed, limit the ability of the lender to change interest rates based on changes in the borrower's perceived risk profile -- but certainly not to the extent I characterized in my prior blog posting.
So... first, I wish to extend thanks to my fellow Fools who helped set me straight. Second, my apologies for the hyperbolic mischaracterization.
It's still true that this legislation will likely increase costs and limit the ability of the credit card companies to hike rates and fees -- which are costs that will need to be passed on to others -- which stand a very good chance of getting passed-on, at least in part, to those of us who've been enjoying the 'sweet deal' I wrote about in my last blog post.
If this does happen, I certainly will miss the 'free ride' I've been getting -- that part hasn't changed.
But I stand Foolishly corrected when it comes to my characterization of the restriction on pricing credit for risk.
Russell (a.k.a. TMFEldhrehad)