A credit card, normally plastic, is a symbol of credit worthiness implied on the authorized card holder by a financial institution. The card is issued by the institution upon verification of a person’s credit worthiness. The holder is then assigned an account upon which his or her transactions are charged.
The card holder is then allowed to make credit purchases with the card issuer’s guaranty that payment will be made to the seller. At the end of a specified period, normally a month, the card holder is the supposed to remit to the card issuer the sum amount of purchase equivalence made on the card. Failure to this periodic term results in charges by the issuing institution.
One of the disadvantages of using the credit card is the interest rate charged on the outstanding amount after the end of a specified period. The rate is deemed to be high and many people have been asking the question, “should the government be allowed to regulate the interest rate charged by the credit companies on the defaulters?”
This paper seeks to justify the statement that even though credit cards are a result of voluntary contract between the card holder and the issuing company, the government should limit interest rates that the credit card companies are allowed to charge their customers. The paper will look at the current regulations on the credit card companies including regulations on the interest rates in relation to the government’s capacity to regulate them.
2. Limiting the Rates
2.1 Discriminatory Rates
One of the reasons why the government should limit interest rates on credit card users is the variance in the charged rates. There is at a particular time a wide gap between the lowest rate and the highest rates charged on the credit card customers. The determination of the rate has been left at the discretion of the credit card companies.
Cases are witnessed where a given credit card company will impose a rate on one user and a much lower rate on another user. A case observation was noted by Simon that in a given week, there was a record of 9.99% rate and another record of 18.24 %. The problem is that this freedom to charge any interest rate can be personalized beyond economic and market forces.
Areas with few credit card providers can see the companies colluding to jointly raise the rates in order to increase their incomes. A manager can as well apply the freedom on a discriminatory way based on the customer’s race or any other factor. A strict regulation on the limit of the rates can reduce the variance witnessed some of which are just but because of greed and personal attitude of the company officer (Simon 1).
2.2 Avoiding Unnecessary Exploitation
Another reason for call of the government’s ability to regulate the rates is that the freedom gives the companies an exploitative opportunity. Having the power to set the rates can see a company impose an exorbitant rate on a particular consumer merely on the basis that it has the right to do so. An extremely high rate could be imposed on an individual on a revenge basis and no legal contest can be mounted as the company shall have breached no law, may be unless an ill motive can be proved.
A case like a 79.9% charge as reported by Prater is charged on a person and the credit card company had a ground to defend its legality. Ignorance is no legal defense but not all citizens are lawyers. Government’s move to limit this rates will induce measures on the credit card issuers to take fairer steps of controlling defaulters rather than extracting extra money from them (Prater 1).
2.3 Protecting Citizens
Rockoff noted that one of the reasons for interest rates regulation by governments is to protect the citizens who are forced by circumstances to borrow. The concept of rates on loans is similarly applicable to rates on credit cards. There are individuals who actually lack basic human needs and do not have the capacity at the moment.
Their income could as well be low leading to their current inability to purchase. Under this condition, a credit company will likely charge a higher rate which the individual might not be able to afford. It should therefore be seen as the government’s effort to help its citizens meet their basic needs.
Controlling the credit card interest rate limit will make more affordable to the considered poor who can the use it to meet their needs on a credit basis (Rockoff 1). In addition, Smith attributes the high interest rate to the issuing company’s greed for money. The companies in their quest to make more profit induce selfish regulation that will favor their profit objectivity at the expense of the credit card users. The users remain voiceless victims on the ground that the contract is voluntary (Smith 1).
3. Opposing Views
The main opposing view to the government limiting the credit card interest rate is that it will interfere with the free market system. Those with the view claim that a low limit interest rate will see many people living beyond their means and in the long run failing to pay the credit card companies the dues.
The argument may be true that at low interest rates, many people will be enticed into the credit card system and the number of defaulters will be higher. This view that at a lower cost (the interest rates), consumers are attracted to to the product which in this case is the credit card. Morton on her explanation on price regulations explains that when prices are taken down, below the optimum, consumers will go for more of the product. Their argument is valid but with a reservation (Morton 1).
In view of the above discussion, it is evident that the government’s move to control the credit card interest rates is more a benefit to the consumer than the current situation where by it is at the discretion of the companies to dictate the rates. In controlling the rates, the government will be moving to protect its citizens from exploitation by the credit card companies as well as reducing discrimination due to people’s financial levels.
The move will also help the less fortunate citizens in terms of financial status to acquire goods and services and make payments at a later time when they get money. Of course this time refers to a period agreeable to the credit companies. It is therefore more beneficial for the government to obtain the powers to limit the interest rates charged by credit card companies.
Morton, Fiona. The problem of price controls. Cato Institute, 2001. Web. February 21 2011.
Prater, Connie. Issuer of 79.9% interest rate credit card defends its product. Credit Cards, 2011. Web. February 21 2011.
Rockoff, Hugh. Price controls. Library Economics Liberty, 2008. Web. February 21 2011.
Simon, Jeremy. Credit card interest rates fall for record 4th straight week. Credit Cards, 2011. Web. February 21 2011.
Smith, Gordon. Major Credit Card Interest Rates. Ezine Articles, 2011. Web. February 21 2011.