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5 months ago
Write short notes on credit card regulation.
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Business and Its Environment
Edition: 7th
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5 months ago
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Borrowing on credit cards reached nearly $1 trillion in 2008, and Congress has been active in regulating practices in the industry. Consumers complained about large and sudden increases in interest rates on credit card borrowings and about late fees imposed without adequate notice, among other practices. In response Congress passed the Credit CARD (Card Accountability Responsibility and Disclosure) Act of 2009 to increase the regulation of credit card issuers. The Act as well as regulations by the Federal Reserve System provided transparency to credit card users and also significantly restricted the practices of the card issuers. Regulations intended to eliminate abuses can have effects on markets. The new regulations restricted the ability of card issuers to use risk-based pricing and to re-price risks when a cardholder had a credit event. The reduced pricing flexibility meant that risks could not be priced efficiently. The issuer then had the choice between bearing the risk, imposing the costs on other cardholders, or cancelling the card. Bearing the risk forces other cardholders to cross-subsidize the high-risk cardholder through higher average interest rates, whereas cancelling the card avoids cross-subsidization by letting high-risk cardholders turn elsewhere for credit. Kenneth Clayton of the American Bankers Association said, Prior to the Card Act, we were able to charge people for the risk they posed and, as a result, also allowed others to pay lower rates. When credit card issuers cancel the cards of high-risk cardholders, fewer people have access to credit.
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