About those high interest credit cards Senator Durbin…
And I certainly hope all of our readers had a wonderfully Merry Christmas!
So remember when Dick Durbin was hyperventilating about the onerous interest rates and fees that the evil banks were charging consumers with crappy credit?
“Wall Street reform is really about two things: holding the big banks accountable for how they operate and empowering consumers to make good financial choices. Passage of this amendment is a win for the public on both fronts.
Passage of this measure gives small businesses and their customers a real chance in the fight against the outrageously high “swipe fees” charged by Visa and MasterCard. It will prevent the giant credit card companies from using anti-competitive practices, allow merchants to offer discounts to their customers and restore common sense and fairness to this broken system.
By requiring debit card fees to be reasonable, and by cleaning up Visa’s and MasterCard’s worst abuses, small businesses and their customers will be able to keep more of their own money. Making sure small businesses can grow and prosper is vital to putting our country back on solid economic footing.”
Senators Durbin and Reid looking for a bright future where consumers with crappy credit get “A Paper” credit card rates!
So Senator Durbin got his wish. No more high interest credit cards from banks. Some of those banks were charging upwards of 30% interest and fees on things like overdrafts when consumers failed to keep track of their account balances and got caught playing the float. And, I expect that Senator Durbin thought that banks would change their fee schedules and not even look at their operating practices, like maybe the people they give credit cards to. Well, that’s what you get when you’re being represented by people who have never had a real job or had to make a payroll. Guess what. Another “unexpected” result. Banks quit granting credit cards to people with poor credit and canceled those they had outstanding. No more 30% bank interest rates. Thank you Senator Durbin and your fellow Democrats. And a couple of Republicans.
So fast forward to “now”.
Consumers with poor credit can’t get bank credit cards. They still need/want credit. Todd Zywicki at The Volokh Conspiracy nailed the unexpected today.
“We believe that we’re starting to see a benefit of a general reduction in consumer credit, particularly … subprime credit cards,” Patrick O’Shaughnessy, Advance America’s chief financial officer, told investors in November.
Good news, right? Fewer subprime credit cards. Saving consumers lots of money on those high interest (30%+) credit cards. Thank you Mr. O’Shaughnessy. I’m sure Senator Durbin and his friends who wrote and passed this legislation are tickled pink. Oh yeah, there’s that Law of Unintended Consequences. Like, for instance, I’ll bet you don’t know who Mr. O’S is and you likely haven’t heard of “Advance America”, right? Well, for starters Advance America is not a political organization as one might imply. It is headquartered in Spartanburg, SC and is a payday loan company. If you’re not familiar with payday loans, good for you. Bottom line, you can typically borrow up to $1,500 unsecured by writing a check to the lender for the balance of the loan on your next payday. You don’t need good credit, you just need a bank account and a job that direct deposits your check. If you can’t pay off the whole balance, the lender will allow you to “roll over” your loan by making a minimum payment and paying a “roll over fee”. No more 30% bank interest rates.
So, what would the fees be for a payday loan? Well, according to mypaydayloan.com (not affiliated with Advance America but their rates are typical for the industry), if you borrow $100 until your next payday…
- For 18 days, you will pay a $25 loan fee, paying back $125 for your $100 loan. The APR is 507%.
- For 14 days, you will still pay a $25 loan fee, paying back $125 for your $100 loan. The APR is 652%.
- For 7 days, you will will still pay a $25 loan fee, paying back $125 for your $100 loan. The APR is 1,304%.
Michael Corleone should do so well. But hey, no 30% to the bank. To put it in perspective, if you borrowed $100 at 30% from your bank, the cost when repaid in one week would have been about $2.50. Your payday loan is ten times that. Again, thank you Senator Durbin. Note that fees and APR will vary by lender and by state. Note also that even if the APR for a lender is 200 basis points lower than the example shown, it’s still a hell of a lot higher than 30%.
This is a case in point – one of thousands we could point to – where Congress, specifically Congressional Democrats, enact legislation “for the children” and the net result is the exact opposite of what they said they intended. Think they’ll try to fix this little bobble? No, I don’t either.
Oh, and for the record, if they outlaw “payday loans”, the lenders will switch to “auto title loans”. Secured by the car that they will repo if you’re five minutes late with your payment. See Arizona.
- Payday Lenders Go Hunting (online.wsj.com)
- Senate’s Durbin Plans to Seek Fee Limits for Prepaid Debit Cards (businessweek.com)
- Lessor of Two Evils: Credit Card Cash Advance vs Payday Loan (paydayloans.org)