NCPA - National Center for Policy Analysis


October 22, 2009

Falling prices and growing consumer choice over time have defined the dynamic of consumer credit. Consumers today are no longer captives of local banks or pawnbrokers.  Instead, they can choose from over 6,000 issuers of credit cards operating in a national market.  Instead of being forced to buy their new stereo or television from the local department store just because that is the place that happens also to offer credit, consumers can buy appliances at small boutiques, through a catalogue, or online, and use their general bank card to pay for them, says Todd Zywicki, a professor at George Mason University School Of Law.

As a consequence of the general tightening of credit markets over the past year, however, consumers and small businesses have lost some access to the lower costs and more flexible terms of credit cards, explains Zywicki:

  • According to news reports, the response has been a migration toward greater use of alternative types of credit-like pawnshops, layaway plans, and payday lenders-by middle-class borrowers and small businesses.
  • Drying up access to credit card credit will roll back the clock to these old forms of credit that had been thought long abandoned.

Historically, though, the greatest threat to modernization of consumer credit has been the heavy hand of government regulation, says Zywicki.  Like usury laws, the so-called Credit Cardholders' Bill of Rights, passed earlier this year, can be expected to have many unintended consequences, too.

For example:

  • It prohibits issuers from raising rates "retroactively" on outstanding credit card balances.
  • This proposal, however, ignores that fact that unlike traditional installment credit, a credit card loan amounts to a new loan every month-hence the name "revolving."
  • Similarly, consumers can pay off balances with no prepayment penalty by switching to a new, lower-interest card.
  • Under the new regulation consumers can always reduce their interest rate by switching cards, but the credit card issuers are prohibited from raising rates when economic conditions change.
  • As a result issuers will be reluctant to offer lower rates on the front end.
  • This will mean less flexibility and higher rates for all consumers.

Once again we'll see that the Law of Unintended Consequences can't be repealed, says Zywicki.

Source: Todd Zywicki, "America's Debt Paranoia," The Freeman, Vol. 59, No. 8, October 2009.

For text:


Browse more articles on Government Issues