Congress steps up on predatory credit
By Thomas F. Schaller
June 2, 2009
I last wrote about America’s abysmal savings rate. Now, the flip side: our even more crippling credit card debt situation.
According to a recent study, in 2008 more than 91 million U.S. households, or 78 percent, held at least one credit card, with an average of 5.4 cards per household. Total credit debt as of December 2008 is $973 billion, with a household average of $8,329.
Almost 90 percent of that outstanding debt is held by 10 creditors; Chase, Bank of America, Citi, American Express and Capital One (the company with those zany commercials) are, in order, the top five creditors.
All of this borrowing and lending would be of little concern if American cardholders were borrowing money in the short term and paying those debts off immediately or within a few months with some interest. In fact, given that almost no merchants offer lower prices for paying cash (I occasionally see a gas station that still does), in some ways it makes more sense to use a credit card: Cash is much harder to recover if lost or stolen, and taking cash out from ATMs can incur fees.
Unfortunately, too many Americans use credit cards to finance their purchases over the longer term, at which point debts become punitive, even paralyzing. Many card holders quickly find themselves in a debt spiral wherein they can never pay back the principal – exactly what credit card companies want, explains Tom Geoghegan in recent essay for Harper’s magazine.
Mr. Geoghegan notes that annual percentage rates were more or less capped by states at around 9 percent until the Supreme Court ruled in 1978 that banks could lend at the rate allowable in the state where the bank is located, not where the creditor lives. “Now we’re all shoveling billions into the banks, and there’s no way working people who can’t get a raise will ever climb out of debt,” writes Mr. Geoghegan.
Credit card companies can be ruthless, too. A recent Pew Charitable Trusts survey of such companies revealed that 93 percent allow issuers to raise the interest rate at any time by simply changing the account agreement; 87 percent allow them to impose penalties even if the borrower is not 30 days or more overdue; and 72 percent offer promotional rates that can be revoked after a single late payment.
Last month, Congress passed and President Barack Obama signed a new law that would provide greater transparency for credit card holders and new restrictions on issuers. Among the provisions: Credit card companies can no longer change the teaser APR rates they use to lure customers within the first six months; cardholder payments must be 60 days late before companies can assess penalties; creditors must alert cardholders 45 days in advance of any rate changes, fees or finance charges; and cardholders whose rates are increased as a result of late payments must have their original rate restored after six consecutive months of on-time payments.
Overall, these changes should eliminate some of the predatory aspects and reduce the informational asymmetries that favor creditors over consumers. Hopefully, consumers will make more discriminating choices about using credit and, once burned, will be twice shy about sliding that card to buy non-essential items.
But maybe not. A recent study by University of Maryland economists Haiyan Shui and Lawrence Ausubel found that consumers, lured by attractive teaser rates, often made poor choices despite clear, preferable alternatives. “The problem isn’t in the availability of information [but] the processing of the information,” Mr. Ausubel recently told Time magazine. And, whatever might be said about predatory profiteering of credit card companies, every dollar of the nearly $1 trillion in current debts started with a purchase made by a consumer.
Using plastic more wisely will help, but using it less often is crucial.
Thomas F. Schaller teaches political science at UMBC. His column appears regularly in The Baltimore Sun. His e-mail is schaller67@gmail.com.
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