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Standing Corrected



May 21, 2009 – Comments (8)

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)

8 Comments – Post Your Own

#1) On May 21, 2009 at 4:19 PM, motleyanimal (38.64) wrote:

Yes, I will miss my $50 gift cards from Chase, if that becomes the case. But I certainly won't pay an annual fee, if I can avoid it. There will probably be better deals at the credit unions.

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#2) On May 21, 2009 at 4:27 PM, devoish (73.48) wrote:

Can we still have a "Take a Banker Camping" day?


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#3) On May 21, 2009 at 4:32 PM, farmnut1985 (< 20) wrote:

I was thinking more like pheasant hunting.

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#4) On May 21, 2009 at 5:55 PM, foolsMeThrice (99.38) wrote:

The truth is why use a credit card when you can use a Schwab account to do effectively the same thing at roughly 8%.  Rates don't get much better than that.  But I don't have a margin account so I don't fall into this trap.  (I also have only one credit card with a puny balance on it).  This is not a promo for Schwab but I also get to enjoy ATM fee rebates on every transaction.  If you take out 100 dollars and the ATM fee is 3 dollars, well you just got charged 3% for nothing.  So Schwab if used for no other reason makes sense for the ATM fee reinbursment.  I know it might sound ridiculous to use your brokerage account as a credit card but it is exactly the same as using a credit card but better, far better rates and it is secured.  One more thing, if you have a cash balance, then no interest is charged, the transaction is deducted from your balance.

What I've been doing using my Schwab account for ATM transactions then transfering money from my regular bank accounts electronically via the external accounts setup.  I transfer the exact amount of the ATM transaction.  This saves me 2 to 3% on my money.

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