On Friday, President Obama signed into law the most sweeping reforms to credit cards in about 40 years. Some of the key changes relate to limited how much credit card companies can use behavioral economics to encourage consumers to make decisions that generally are not in the best interest of the individual or the country at large.
In light of the current economic crisis, Obama has been looking at how sophisticated use of behavioral economics (the intersection of economics and psychology) influences the choices consumers make, often to their detriment.
A few of these changes:
- Next to the minimum balance on credit card statements, companies must now provide a calculation of how long it would take to pay down the debt at this rate. RATIONALE: most people don't realize that they could continue making the minimum payment forever, without paying down the debt!
- Banks can't give credit cards to minors (especially college students) without verifying ability to pay, or asking for permission from parents
Industry analyst Robert McKinley, founder of CardTrak.com, which consults with banks believes that Congress is just beginning to rein in credit card companies, pointing out that
"It's been the Wild West for the card industry for a long time."
I am generally a fan of behavioral economics and admire many of the things credit card companies do to build loyalty among their customers and to develop new products and services targeting specific niches of consumer behavior. However, there are certain cases where these practices border on the unethical and are in great part to blame for our current debt crisis. 90% of Americans have credit cards, owing on average over $10,000, according to CardTrak.com.
If marketers don't self-police the ethics and values of their own industries, and ensure that they are working in the customer's best interest, the government will eventually come along, and likely with a heavy hand. Especially in the current environment.
