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Passing Glance at Credit Cards

October 30, 1987

Want to earn an easy 18% or 20% on your money? Simple, say financial counselors. Just cut up your credit cards. If you can't afford to pay off your credit-card debts in full each month--and most people can't--stop using the cards. The average interest rate on credit-card debt now is 18.3%. Not having to pay that is equivalent to, well, putting money in the bank. The problem, of course, is that the 100 million Americans who hold 700 million credit cards are usually willing to incur fat interest charges for the convenience that they get in return. That being the reality, they ought at least to have a better idea beforehand what they will be paying. Legislation passed by the House this week is a step in that direction.

Currently, most credit-card holders find out only when they receive their cards what annual fee and interest rate they will be charged. The House legislation, which is expected to be approved by the Senate and signed by President Reagan, says that in the future these disclosures will have to be made when consumers apply for cards in response to magazine advertisements, direct mailings or telephone solicitations. The purpose is to allow some comparative shopping and, just maybe, to force greater rate and fee competition in the credit-card market.

The House had no problem in approving this innocuous change. It balked, though, at a proposal to cap credit-card interest rates at 8 percentage points above the yield on one-year Treasury securities. Right now that would come to 15.3%, hardly a pittance. The banking industry claimed that this idea was anti-consumer. Any interest-rate cap that lessened its rewards for taking risks, it suggested, might force it to deny credit to lower-income consumers. This raises a couple of interesting questions. One is whether lower-income people should be encouraged to run up credit-card debt in the first place. Another is whether other credit-card holders should have to pay usurious rates to underwrite the creditors' risks in such cases. It's too bad that the House didn't see fit to look seriously at these issues.

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