Wednesday, May 20, 2009

When credit cards are outlawed, will only outlaws have credit cards?

All Hades will break loose when the credit card reforms now whistling through Congress become law, our banking friends imply.

Worthy borrowers may find it harder to get loans, the American Bankers Association frets. The estimated 60 percent or so of us who pay off our monthly balances in full may be whacked with annual fees and other irritations like eliminating interest-free grace periods, other industry sources worry.

Yeah, maybe. But I'm not betting on it.

First, this isn't a new debate. It wasn't even new when Kiplinger quoted commentators mewling on it 11 years ago. The end of that world is a long time coming.

Also, card users who pay full balances on time are significant revenue sources for financial services providers. Each time we swipe a card, the financial services industry collects what's known as an interchange fee, usually equal to between 2 percent and 3 percent of the transaction's value. When I paid $173.83 for some auto maintenance a couple weeks ago, about $4.35 of the money went to some guy halfway across the country to cover handling.

We, and specifically the merchants who actually collect the money, paid the banks almost twice as much in interchange fees as the banks collect on penalties that Washington wants to crack down on, the Government Accountability Office calculated in 2006.

And while our two to three cents worth is far smaller than the interest banks collect on card balances, it's also far more dependable. Borrowers can welsh on loans. We pay the fees to use the cards. Lenders aren't going to walk away from easy money like that, say commentators such as Barbara Kiviak at The Curious Capitalist, Rick Newman at U.S. News & World Report and others.

Plus we have good repayment records, which means we generally get some first cracks at the best new offers the lenders make. So if someone tries to slap an annual fee on our cards, we'll walk. And if all the lenders start charging annual fees or abolishing grace periods, that's not a big problem either. Mrs. KTnomics and I are old enough that we get free checks from our bank anyway. They often have free pens in the lobby too.

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