Financial Responsibility and the Era of Credit Cards

“That” Kid
Do you remember “that” kid? I’m referring to the kid that always spoke out of turn, or tackled others during two-hand touch football. It was the same kid that like to take everyone else’s lunch money. Remember what happened in second period when we were allowed to talk quietly for the few minutes before class got out and that kid made an obnoxious scene? I do, and I am sure you do too. The teacher brought those games and those freedoms to an abrupt end. Everyone remembers “that” kid. Now, in the interest of fairness, Obama is ending the financial carnival offered by credit card companies.

“That” Kid “Grew” Up
As an adult, this kid’s childlike, bullish, see-it-take-it tendencies have wavered little. His tastes are more refined. He has become a connoisseur of fine wine, a commander of a flashy SUV, and a consumer of brand-name, depreciating merchandise. For all his riches, you’d think this person –the same guy that managed to sleep through first period and still graduate – to be quite wealthy. Unfortunately, but not unexpectedly, he has spiraled into financial disarray with his credit cards. The government, as paternalistic as it is, swoops in and saves him from the clutches of the industry that allowed him such hurtful freedom.

Who Pays the Bill?
Credit card companies are now notifying its holders that the traditional rewards some (including myself) had come to appreciate are coming to an end. The reason: tighter regulation of the credit industry. On the surface, these new rules seem fair and even purport to put the consumer on equal grounds of those evil credit card companies.

What can the consumer expect? Among other consumer “perks”: no interest increases until 60 days of default and the resetting of the original APR after six months of timely payments.

The credit card industry is a business to make money; it profits on its holder’s tendency to carry a balance. Though its motives are capitalistic by lending money at higher interests rates to riskier consumers, they also benefit the diligent by offering introductory 0% financing, frequent flyer miles or cashback rewards. But when the industry is slammed with legislation binding its ability contractual lend money, nobody wins.

Answer: We Do
But what this means practically is that those credit card consumers that have continually paid on-time and enjoyed the lower rates, cash-back or point rewards – those that I like to consider the “responsible ones” – these are the ones paying the for “that” kid’s spending patterns. Result: game over. The teacher now takes away the ball or now gives the other students busy work for the last few minutes of class.

See, with less credit card regulations, companies have been able to freely tier those they lend to. For example, John Q, a non-risky bill payer will enjoy lower interest rates than John S who has a habit of carrying a high balance and sometimes misses an occasional payment. New legislation signed by Obama effectively obliterates this distinction drawn by the unregulated industry.

Is This Good?
Concluding this post is tough for me and could easily become unwieldly. Where does one draw the line because usurious and cautious? On one hand, we have complete federal regulation of the credit card industry and at the other – complete deregulation (think pay-day loans). I’ll end by stating this: I don’t like this new legislation.

I won’t take the position that I am somehow “entitled” to my credit card reward points, but I do think that incremental steps, even benefit the minority – those that cannot handle money wisely. In that case, the solution is not necessarily regulation the credit card industry but through fiscal education taught to both parents and children. Sadly, at times, these groups overlap.

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