Credit Cards are About to Get Worse

John Stossel

Next time your credit card company raises interest rates, or imposes an annual fee, or cuts back on your rewards program, or suddenly charges you for your “free” debit card and checking account … blame Rep. Barney Frank and Sen. Chris Dodd. They were the key sponsors of laws passed this year that promised to “protect” you from unfair penalties, fees and interest rate hikes…

…Stopping credit card companies from imposing penalties or raising interest rates on customers who pay late doesn’t make those costs disappear. It means the rest of us now pay for them. Since the politicians “protected” us, credit card interest rates have risen nearly 2% … while rates on mortgages and treasury bills dropped.

The latest credit card “fix” is a cap on something called “interchange fees” — that’s the fee merchants pay credit card companies, usually about one percent of every transaction for debit cards. (If a customer makes a $100 charge, about $99 goes to the merchant and $1 to the bank.) Yesterday, as required by the new Dodd-Frank Wall Street “reform” law, the Federal Reserve proposed a cap that dramatically reduces this fee.

Merchants, of course, applauded the rule. Mallory Duncan, Chairman of the Merchants Payments Coalition said “Today’s proposal will result in savings for small businesses and consumers.” The media parroted this view. Reuters financial blogger Felix Salmon called it “a victory for consumers”.

Nonsense.  There’s no free lunch. Economist Todd Zywicki of George Mason University points out that if merchants will no longer pay into that system, the costs will be borne by consumers:

“What we saw in Australia, for instance, when they limited interchange fees is interest rates went up.  Annual fees went up.  And benefits to consumers, such as frequent flier miles went down. All that’s going to happen is that they’re going to transfer costs that are currently being born by merchants over to consumers and consumer’s going to feel the pinch one way or another.”

So don’t forget to thank Barney Frank and Chris Dodd!

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