Friday, December 14, 2007

Playing fair takes two

My latest post the Blog at Mises.org(Mises.org):











In an editorial in today's Columbus Dispatch, Sen. Carl Levin, D-Mich., and editors take credit card companies to task for raising the interest rate of certain cardholders. Sure, it's always easy -- and politically effective -- to attack big business, but Levin and the Dispatch editors missed the other half of the equation: the cardholder.

Here is the issue: An applicant for a credit card fills out an application -- a contract -- that specifies certain conditions. One of those conditions is credit worthiness. During the application review process, the bank checks the credit scores of the applicant. The assumption is that the applicant will maintain his relative credit rating and not enter into agreements that will negatively affect his credit scores. Based on credit scores and other information, the bank agrees to issue a credit card -- with a specified rate of interest -- to the applicant.

At some point after the credit card is issued, the cardholder's credit score declines for some reason. The bank, in order to protect its investors, raises the interest rate on the credit card. The cardholder and politicians cry foul. The politicians claim that the bank is unfairly punishing the cardholder, never mind that the credit card agreement specifies that the interest rate may rise if credit scores fall. Regardless, this is but one side of the equation.

The bank on the other hand sees a cardholder who has reneged on his agreement with the bank. How? By doing things that negatively affect his credit rating. Maybe he takes on additional debt or starts to miss payments. These actions justifiable lower his credit scores and raise his credit risk. Yet, he expects the bank to continue pretending that he is still relatively credit worthy, and in the same financial situation as the day he applied for the card.

In essence, the cardholder reneges on his agreement to maintain a relative credit rating, and then blames the bank for taking necessary action.

Isn't it time for some folks to grow up and take responsibility for their actions? Isn't it time for government to quit rewriting contracts that were agreed upon by entities under neither threat nor compulsion?

There always is two side and two tales to tell. In this case, government is wrong once again.

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