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'A Test for Credit Expansion'

August 03, 1988

You correctly title your July 18 editorial supporting pending legislation to deregulate retail credit in California "A Test for Credit Expansion." Unfortunately, the test has been conducted in other states and deregulation has failed the consumer miserably. As the director of the West Coast Regional Office of Consumers Union, nonprofit publisher of Consumer Reports, I say, why import that failure into California?

Californians owe an estimated $7.4 billion in retail credit debt. Current law limits the interest rate which may be charged to 18% for the first $1,000, and 12% for amounts over $1,000. SB 2592 awaiting final vote in the Assembly, would remove all ceilings for three years, deregulating retail credit in California. Conservative estimates are that the removal of the cap will cost California consumers an additional $150 million per year in interest charges.

When interest rates were extraordinarily high in the early 1980s, retailers argued that they needed higher rates to offset interest costs. Now, despite lower interest charges, retailers insist they still need higher interest rates.

Major retailers readily admit that they will raise their rates to 21% in California. They did so in New York and New Jersey after deregulation. The sky may be the limit for smaller retailers' interest rates. The Consumers League of New Jersey has copies of a New Jersey contract for a refrigerator sold on credit at 41.25% interest and other contracts at 30% interest.

Your editorial asserts that lifting the retail credit rate ceilings could make credit more available. However, retail credit did not become available in New York. A post-deregulation study by the New York State Banking Department found that retailers "did not change their credit standards or credit lines . . . nor did they increase their participation in consumer lending."

Your editorial also suggests that retail credit should be treated like bank credit cards, but there are significant differences in the two types of credit. Banks advertise credit card interest rates, but retailers almost never advertise their interest rates. The reality is that people shop for goods, not credit.

In September, 1987, Gov. George Deukmejian vetoed a bill that would have allowed the retail credit interest rate ceiling to remain at 19.2% rather than to revert to 18%. He said, "The record is devoid of evidence supporting the continued need for the higher ceiling." There is also no evidence to support a repeal of the interest rate ceilings on retail credit.


Consumers Union of U.S.

San Francisco

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