On top of job losses, foreclosures, and mounting debt, many Americans are feeling dismayed by the one tool that they thought would allow them to keep spending: their credit cards.
As the economy slides, consumers are finding some nasty surprises on their credit card bills, from lower credit limits to higher fees for late payments. One bank even added a $10 monthly fee to a no-fee credit card (but has since backed off due to public pressure). The changes can also hit those who pay their bills fully and on time. Some customers who take on new debts, for instance, can be hit with lower credit ratings, which can trigger higher interest rates.
Facing growing public anger, government officials are taking their concerns public. Last week, the House Financial Services Committee approved a bill that would restrict practices that sponsor Rep. Carolyn Maloney of New York calls "unfair, deceptive, anticompetitive," and "just plain bad for consumers." The Obama administration, which is planning a broad push on consumer finance issues, called in executives from 14 credit card companies last Thursday to press them to clamp down on the practices. The White House also unveiled its own list of proposals for the bill, including "no more fine print" in forms sent to cardholders and more-stringent industry oversight.
The credit card industry sees itself primarily as a scapegoat of the financial crisis. As unemployment climbs, issuers say, more people are failing to pay on time, hurting their credit ratings and triggering higher interest rates. "Interest is always covering losses," says Nessa Feddis, vice president of the American Banking Association, the industry's trade association. "You can't lend out $10 to 10 people, get $90 back, and then have money to lend to other people." Financial firms also worry that some of the proposed restrictions could limit the volume of lending.
Legislators, not to mention their constituents, aren't convinced. When the Federal Reserve took up the issue in December, it received more than 60,000 comments on its proposed changes in regulations. The result was a crackdown on practices like "two-cycle billing," in which a cardholder who pays the entire account balance one month but not the next gets charged interest on the average of both months of debt. The regulations take effect in July 2010.
While the rules are a good start, says Maloney, the government needs to codify them. "Regulation can easily be changed or delayed," she says. "It can be challenged and evaded far more easily than a law." Her bill, which could go to a vote next week, goes further by, for instance, allowing consumers to choose their own lower credit limits. The Senate's companion legislation would be stricter still, banning companies from issuing cards to people under 21.
The debate is as much political as economic. Because some of the companies engaging in the practices have received more than $120 billion in bailout funds, the issue is a potential tripwire for the Obama administration, which is still smarting from the uproar over executive bonuses at the government-bailed-out American International Group. "We need more accountability in the system," Obama said after last week's meeting. Credit card issuers who ignore the rules, he added, "will feel the full weight of the law."
Whether they like it or not, change may be coming to credit cards. And not the kind that plastic is meant to replace.