Credit cards are in the news of late. Defaults and charge-offs (when card company treats debt as uncollectible) are at record highs. Card companies are responding by raising interest rates, cutting limits and increasing fees. Politicians are responding to that by drafting legislation to keep the card companies in check. Card companies (several of which could be owned by the U.S. taxpayer) are responding to that by claiming legislation will put their profitability at risk, and that the real victims of the new laws will be U.S. consumers who won't get credit at all or, at a reasonable price.
I am going to try to cut through the noise and tell you what I think:
1. Credit card companies have been tricking consumers for way too long. But for the lack of space, I could give you 5 or 10 examples of how the card companies could have made plenty of money and still treated consumers fairly.
2. Many credit cardholders have also been irresponsible -- overspending, doing nothing to educate themselves as to how card companies work, failing to monitor card solicitations to young adults in their families.
3. As with the housing crisis, our politicians have been spastic in their approach toward credit card regulation. With the exception of steady consumer advocates like U.S. Representative Carolyn Maloney of New York, our leaders have ignored card company abuse until we have a crisis (now).
4. Credit card debt is about $1 trillion dollars as against mortgage debt of about $13 trillion dollars. So, whereas credit card defaults will definitely hurt the lenders, the magnitude of the problem is not on the same level as the housing/subprime mess.
The biggest issue for me is reactive legislation. Because of the large number of consumers in duress today, many of whom depend upon their credit card to purchase necessities, there is a high likelihood of new legislation in the next month or two (if the Administration can convert some Republican senators). This legislation will create laws that limit how card companies calculate interest due, when they can raise interest rates and assess fees, and what kinds of disclosures must be made.
For years and years consumers and their advocates have been asking politicians to look at what was going on in the credit card world. Whereas consumers are far from blameless, the card companies -- perhaps with a push from the government -- could have done a much better job educating people and treating them more fairly. Now the politicians are enraged, and sensing headline-grabbing opportunities, are going to put their headlights on this pending crisis (pending for about ten years) and push the pedal to the metal. The result will probably be new laws -- forged not in reasonable discussion and deliberation -- but in the heat generated by the glare of spotlights.
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