Senate Panel Votes to Drop Limits on Store Credit Card Interest

With solid backing from large California retailers, a Senate committee on Wednesday voted to drop state-mandated interest rate limits on credit cards, which would allow stores to charge whatever interest rates they want.

Opponents of the bill, including Atty. Gen. John K. Van de Kamp and the Consumers Union, blasted it as an affront to consumers, particularly the poor and elderly who tend to make extensive use of revolving credit accounts. Van de Kamp has called the measure “one of this year’s worst bills for California’s consumers.”

The bill would affect customer credit accounts at all California retail stores. Backing the bill were several large department stores, including Bullocks Wilshire, Brueners, Mervyn’s, Sears, May Co., J. W. Robinson’s, I. Magnin and Buffums.

Harry Snyder, Consumers Union regional executive director, said experiences in other states that have deregulated interest rates show that California consumers can expect an immediate interest rate hike of 3% if the measure becomes law. That would cost consumers about $150 million in the first year alone, he said. A better method of basing rates, he said, would be to tie rates to the actual cost of borrowing.

Commenting after the vote, Snyder said it was like “rape by retailers” on California consumers. He promised to rally consumers throughout the state in an effort to kill the bill.

Authored by Sen. Ralph C. Dills (D-Gardena), the bill would eliminate interest ceilings for a period of three years on retail sales contracts and accounts offered by a wide range of retailers who offer products such as clothes, appliances and furniture. Retailers currently are limited to charging an 18% annual rate on unpaid balances up to $1,000 and 12% on higher balances.

Interest charged by banks on their credit cards, such as Visa and MasterCard, already are unregulated and would not be affected by Dill’s measure.

In passing its first legislative hurdle on a 6-1 vote in the Senate Insurance, Claims and Corporations Committee, the proposed law now moves to the Senate Appropriations Committee.

For nearly 20 years, starting with the Unruh Act in 1959, the state limited interest rates charged by retailers to a maximum of 18%. But in 1980, with the bank prime rate skyrocketing, retailers led by the California Retailers Assn. clamored for relief, claiming that they were losing money on their regulated credit accounts.

In response, the Legislature allowed the maximum interest rate to increase to 19.2%. That increase was extended several times until last year, when Gov. George Deukmejian, citing the large drop in the prime rate since the beginning of the decade, vetoed legislation that would have kept the higher rate in place until 1989. The prime rate was at 19% in 1981. Most banks now charge 9%. In testimony before the committee, Dills described limits on interest rates as “artificial ceilings,” noting that retailers have had to increase the price of their products to cover credit card account losses.

‘They Can Sell More’

He vowed that if abuses such as rate-gouging occur, he would introduce legislation to solve the problem. Sen. Barry Keene (D-Benicia), who voted for the bill, said the current ceiling protects consumers who are otherwise credit risks, and implied that the interest lid hurts businesses. “Retailers perceive they can sell more in California . . . if they can raise rates,” Keene said.

A consultant hired by the retailers’ association, Ray McAlister, a professor of business administration at the University of North Texas, argued that the poor would be better off by having interest rates unregulated because they would not be hit with new credit card fees or late charges.

Deputy Atty. Gen. Ron A. Reiter told the committee there was no evidence that unfettered interest rates led to more competition between retailers. Passage of the bill, Reiter said, will mean higher interest rates and “for this consumers get nothing, either in prices or services.”

The California Retailers Assn. is a major legislative campaign contributor. Through its California Retailers Good Government Council, it gave about $250,000 to legislators in 1986-87, the last year for which figures are available.