The Cost of Democratization: Beyond Economists' Explanations of Credit Card Debt

Andrea Freeman

Abstract

The credit card industry’s business model relies on the payment of fees and high interest rates by the poorest consumers to generate profits and subsidize credit card use by the richest. Industry studies indicate that African Americans and Latinos pay higher interest rates and more penalty fees than whites. Compounding credit card debt disparities are recent census statistics revealing that whites now have a median wealth twenty times higher than African Americans and eighteen times higher than Latinos. Despite the high social costs of deepening inequalities, law and economics and behavioral economics have largely ignored their contribution to market failure in the credit card industry.

After analyzing the adequacy of contract law, litigation, and consumer protection to reduce debt disparities, this Article concludes that increased competition and effectively enforced regulation represent the most viable avenues to industry transformation. An exploration of the potential of unfair trade laws or a public banking system to stimulate competition leads to the conclusion that regulatory intervention is essential. The Article consequently proposes a new regulatory scheme designed to reduce credit card debt disparities under the rubrics of the Consumer Financial Protection Bureau, the CARD Act, and the Community Reinvestment Act. Finally, this Article argues for the establishment of credit as a public utility, recognizing that major structural reform is necessary to reverse the current debt disequilibrium.