Bill to Cut Credit Card Interest Is Tripped Up

Interest rates on many types of loans have dropped below 10%, but credit card users in California continue to pay twice that rate on the 22 million bank cards they hold.

The disparity in interest rates has prompted consumer organizations to accuse major banks of “gouging” and to press state lawmakers to enact a bill that would limit interest rates and fees charged on all kinds of bank and retail charge accounts.

Heavily opposed by major financial institutions, the proposal by Assemblyman Rusty Areias (D-Los Banos) ran into a buzz saw of opposition Tuesday during its first committee hearing and is expected to undergo a major rewrite before it is taken up again for a vote.

Threaten to Move

Bank lobbyists, armed with stacks of financial reports, said the measure will simply dry up credit in the state and threatened to move their credit card divisions elsewhere.

“We would be forced to consider moving our operations out of state,” Frank Schultz, a Bank of America senior vice president, warned during the hearing of the Assembly Finance and Insurance Committee. “That would be particularly bad for employees in California since credit card jobs are good jobs and provide an opportunity for women and minorities.”

Describing bank card charges as “unconscionable,” Areias insisted that credit cards are “the most profitable part of (bank) operations” and that big financial institutions could easily live within the limits of his bill.

Areias’ measure, one of a number of consumer bills being pushed by Assembly Speaker Willie Brown (D-San Francisco) and other influential Democrats in this election year, would link interest rates on bank and retail credit cards to a new index that would rise and fall with money market rates. Annual membership fees would be limited to $18.

If it were in effect now, Areias said, credit card rates would drop from an average of 19% to just over 12%, saving California consumers $500 million annually.

State lawmakers have intervened in the past to control interest rates on certain revolving credit accounts and other consumer loans, but never on bank credit cards. Last year, Areias and other supporters voted to extend for two years the 19.2% interest rate limit on retail installment accounts. If not for that vote, the rate would have gone down to 18%, and Areias said he is sorry that he ever supported it.

The seemingly inflexible attitude that banks have adopted toward their credit card rates has spurred action in several other states that have adopted measures similar to the Areias bill. At least four such proposals also are pending in Congress, but little action is expected there in the near future.

“I felt it was time for California to take the lead,” Areias said in response to questions about the possibility of a nationwide interest rate limit.

Consumer bills like Areias’ measure tend to generate large campaign contributions from influential special interests that want to see the status quo maintained. Nine large financial and retail firms, for example, contributed more than $715,000 to legislative candidates and lobbying groups during the fight over extending the the 19.2% limit on installment credit.

In the case of the Areias bill, banks contend that they would be disadvantaged by any interest rate limit since state laws cannot be applied to out-of-state banks that offer credit cards to California consumers.

Measure ‘Discriminatory’

Gregory Cook, lobbyist for the California Banking Assn., called the measure “discriminatory,” adding that the state of Washington approved similar legislation and that out-of-state banks quickly captured 60% to 70% of the state’s credit card market.

“Banks simply cannot live with it and compete in the marketplace,” Cook said.

Areias countered that the marketplace is not working, citing as evidence the fact that nearly all major banks in California charge cardholders at least 19% while paying 9% or less for their money during a period when the prime interest rate is 9%.