|by Jason Steele|
It is a rare day when credit card industry practices are the front page story of the day. As a consumer finance blogger, I have to say that I am immensely proud of President Obama for meeting with the credit card industry in an attempt to curb their abuses. It is truly unimaginable that our previous administration would have done that. With the President publicly backing the new bill of rights legislation, I now think it has a great chance of passing into law soon.
Should Rates Be Frozen?
On the other hand, I believe that the proposal to force credit card companies to freeze rates is a bit of an overreach. I think that the most important provision of the bill will prevent companies from raising rates on existing purchases. I would also have no problem with legislation capping rates to prevent some of the most abusive lending. I just don’t think congress should go so far as to freeze rates arbitrarily where they are, as Senators Dodd and Schumer have suggested. I would like to believe these are two Senators who are just grandstanding and showing the industry that if they don’t accept the reasonable regulations proposed by the President, then they are willing to enact some unreasonable ones.
Parallels Between The Mortgage Crisis and The Credit Card Crunch
This comparison has been made many times, but I really like this analysis by Robert Reich. Reich’s idea is that this credit card bill is both great politics for Obama, and great for the economy. Right now, people are upset that the government is giving so much money to the banks, yet they are getting hit by the well documented abuses of these same banks in every credit card statement they receive. Reich counter’s the industry suggestion that when fewer abusive practices are allowed then they will be able to offer less credit. He concludes:
“The bankers will tell Obama today that any new contraints on credit card lending will cause the banks to reduce the amount of credit card lending they do, which will hurt the economy. But it’s a weak argument because it presupposes that any lending is good for the economy — even lending to people who don’t know what they’re getting into and can’t repay the loans. It’s the same argument banks used two years ago, when precient observers warned that constraints had to be placed on mortgage lending practices. What may hurt the economy in the short term, we now know, may save it from even larger pitfalls to come.”
I love Reich, but he is an economist who speaks in paragraphs. I could easily condese that into one sentence; Any loan that requires abusive practices to make a profit is a bad loan, an bad loans are not good for the economy.
Speaking Of Abusive Practices…
While not being able to use your frequent flier miles is hardly another crisis likely take down our economy, it is another example of scam, albeit on a different scale than subprime loans, credit default swaps, or Bernard Madoff. Tim Winship over at Smarter Travel has written an interesting piece titled 5 Ways Mileage Programs Are Like Ponzi Schemes. Ultimately he concludes that frequent flier programs are not true Ponzi schemes, however mileage collectors would do well to read this article.
My philosophy regarding mileage is no different that it would be if I had inherited money that was invested with Madoff. Get it out as quickly as possible. I am loath to hold onto any significant miles for more than a few months. If I do, it is only in a flexible system like Starpoints or Membership rewards, where I can chose from many programs when it comes time to redeem miles. Even then, I don’t hold onto miles for years and years. I usually have a goal in mind when I set out to accumulate miles. As soon as I am within reach of the goal, I cash them in as soon as possible.
Keep this in mind when choosing between a mileage card and a cash back card. The cash will earn you interest, but the mileage will always depreciate.