The Fed issued a series of policy proposal changes for credit cards yesterday. Among them was this wonderful bit of paternalism:
The Fed’s proposal would generally prohibit rate increases on fixed-rate accounts in the first year after an account is opened, as well as increases on existing credit card balances. For consumers under the age of 21, cards could not be issued unless the borrower could show an ability to repay the debt or an older person agreed to back the account.
To begin with, consider the business sense it would make to issue unlimited lines of credit willy nilly to individuals under 21 who had no demonstrated ability to repay their debts. Even if credit card companies were run by the most evil of villains, if an individual can’t pay because they have no money then ruining their credit is about the only recourse cause you can’t collect from a bankrupt individual. So we can assume that banks are taking into consideration the ability of someone to repay.
Of course, lenders may be willing to offer a $1,000 or $2,000 line of credit to an unproven borrower, hoping for slow repayment in order to collect interest fees. But why is that a problem? That is a business plan. That is a way to make money. The critique of this is that the banks are being predatory and taking advantage of the borrower by charging high rates for loans. But lending isn’t a zero-sum game.
The person borrowing the money, using the credit card, is the ultimate place the line is drawn here. They are the one’s that should bear the weight of responsibility handling debt. If they overspend, they pay the consequences. It is their choice. It doesn’t hurt other people. And there is a lesson learned. Actual parents or guardians should be teaching their children about responsibility handling money. But the choice comes down to the individual. It isn’t the government’s place to be stepping in to “protect” those under 21 (which is, by the way, an arbitrary age that doesn’t account for the vast amount of irresponsible 25 and 30 year-olds, or the very responsible 18 and 20 year-olds).
But it goes beyond the libertarian ideal of personal responsibility. Let’s say, for instance, that someone under 21 has the ability to repay a loan, but isn’t able to prove it by the Fed’s new standards for some reason. They want to take on the risk. They have something they value that they need the money for. But under this new proposed rule that value would be destroyed by the limited access to credit.
Or how about another scenario. We all have personal tastes and preferences. We also all place value on different things in different ways. Suppose someone under 21 wanted to buy something that cost $1,500 but didn’t have the cash on hand. But, in their own world of choice, they wanted it immediately. That person should have the option of getting access to credit if the credit card company wants to offer it, and paying the interest over time for their purchase. That product may have a retail value of $1,500, but it might be worth $4,000 or $5,000 to the buyer, who is willing to pay up to that much in the interest over time to have it now. That should be an individual choice, not something limited by a government agency’s idea of what is a good use of money.