Sky’s-the-Limit Interest Isn’t Creditable

In 1982 the California Retailers Assn. went to Sacramento and asked the Legislature to raise the interest rate that retailers could charge on their retail credit cards. At the time, the cost of money was more than 20% and interest rates on all forms of consumer loans were at historically high levels. The Legislature agreed and allowed a temporary increase to 19.2%.

Today the cost of money is one-third what it was in 1982. Inflation is low, and interest rates on most consumer loans are one-half the 1982 level. Despite these facts, the retailers are lobbying the Legislature to abolish the current legal limit and allow them to set their interest rates as high as they want. A bill put forth by state Sen. Ralph C. Dills (D-Gardena) to do just that has already passed the state Senate.

Even the governor does not believe that economic conditions justify the retailers’ current action. A study conducted by various state departments, at the governor’s request, strongly recommended that retail interest rates be allowed to decline. The study further indicated that the prime rate was down and that the record was “devoid of evidence” supporting higher interest rates on retail cards, which are often used to purchase household necessities like appliances, clothing and furniture.

The Dills bill would turn back the clock to 1959, when limits on retail interest rates were first placed into law in response to numerous consumer complaints, including ones about excessive interest rates, which were between 39% and 81% at the time.

The retailers say that this “return to yesteryear” should be approved to “benefit consumers.” The retailers claim that the bill would not result in higher interest rates and would make credit more available. However, experience in other states shows that the reverse happens when the legal limits are lifted.

Studies of retail credit conducted in New York and New Jersey contradict the retailers’ rosy predictions. The New Jersey study found that new credit growth was down by two-thirds, while interest rates rose. Retailers in New Jersey all charged 21%. If retailers here started charging 21%, Californians would pay an additional $460 million in finance charges. It is hard to see how this could benefit consumers.

A similar study in New York documented that retail credit-card interest rates rose between 15% and 50%. The study also showed that although interest rates increased, credit availability did not. According to this study, “virtually all the retailers indicated that they did not change their credit standards or credit lines since February, 1981, nor did they increase participation in consumer lending.”

Rates charged in other states without protections similar to those provided by California law reflect what could happen here if this bill is passed. For example, Bullock’s department stores charge the maximum interest rate allowable under California law--18% on balances under $1,000 and 12% on balances of more than $1,000. In Nevada, Bullock’s charges 21% on all accounts regardless of the balance. Macy’s also charges the maximum allowable under California law, but charges 19.8% on all accounts in New York.

Recently in South Carolina, consumers saw interest rates as high as 150%, with some furniture stores reserving the right in their contracts to charge up to 200% and other sellers charging up to 500%. We don’t want this to happen in California.

The “consumer benefit” argument also ignores the detrimental effect that higher interest rates would have on young and low-income people who must rely on credit to make major purchases. The attorney general’s office estimates that each percentage point in the interest rate on retail credit cards would result in an additional $160 million in finance charges actually paid by California consumers. The attorney general also warns that eliminating the cap on finance charges “would encourage a type of ‘bait’ advertising. Many consumers, particularly low-income buyers, would still have to finance their purchases. Sellers would thus have an incentive to advertise seemingly bargain prices, only to disguise part of the actual purchase price through increased finance charges.”

True, the bill would benefit someone: the retailers who stand to reap untold millions from the higher interest rates that would be inevitable under this bill. Although the bill has passed the state Senate, it can still be stopped if consumers share their opposition with their representatives in the Assembly. Only if the voices of consumers are heard can the retailers be beaten.