Hot on the heels of the banking crisis, the employment crisis, and the mortgage/foreclosure crisis, the country is on the verge of experiencing a credit card crisis.
According to the Federal Reserve, the total outstanding credit card debt carried by Americans reached a record $951 billion in 2008 -- a number that will only climb higher as more and more people reach for the plastic to make ends meet. What's more, roughly a third of that is debt held by risky borrowers with low credit ratings.
Credit card defaults are on the rise and are expected to hit 10 percent this year. This will obviously drive many banks closer to failing their stress tests -- but it will have an even greater impact on the lives of people who find themselves sinking deeper and deeper into debt.
It's a particularly vicious economic circle: every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials like food, housing, and medical care -- the costs of which continue to escalate. But as their debt rises, they find it harder to keep up with their payments. When they don't, banks, trying to offset losses in other areas, then turn around and hike interest rates and impose all manner of fees and penalties... all of which makes it even less likely consumers will be able to pay off their mounting debts.
And that's not the end of the economic downward spiral. As more and more Americans default on their credit card debt, banks will find themselves faced with a sickening instant replay of the toxic securities meltdown from the mortgage crisis. In another example of Wall Street "creativity," credit card debt is routinely bundled together into "credit-card receivables" and sold to investors -- often pension funds and hedge funds. Securities backed by credit card debt is a $365 billion market. This market motivated credit card companies to offer cards to risky borrowers and to allow greater and greater amounts of debt.
As these borrowers continue to default, banks and the investors who bought their packaged debt will take a serious hit. And how are the credit card companies trying to offset the rise in bad debts? By raising rates on the rest of their customers -- making it likely that more of them will end up defaulting, causing even more losses for the banks. And round and round and round we go.
And such is the paradoxical nature of the meltdown that Americans keep being encouraged to go back to spending in order to get the economy rolling again. But the problem is, more and more Americans are broke. So the only way they can spend is to charge it, running up balances on credit cards that are structured in a way that makes it harder and harder to pay them off.
Getting dizzy yet?
For years, credit card companies have been fattening their bottom lines with an ever-widening array of fees. Late fees, cash-advance fees, over-the-limit fees. In 2007, lenders collected over $18 billion in penalties and fees. JPMorgan Chase, the nation's top credit card lender, recently began charging many of its customers $10 a month for carrying a large balance for too long a time -- that's on top of the interest they are already collecting on those balances.
And interest rates are escalating. Earlier this month, Citibank warned customers that if they miss a single payment, they could see their interest go up to 29.99 percent (so nice of them to shave off the .01 to keep it from being 30 percent, isn't it?). The company also recently raised rates by 3 percent on millions of non-payment-missing customers. Citibank is not alone: Capital One raised its standard rate on good customers by up to 6 points, and American Express raised rates by 2-3 percent on the majority of its customers.
Sen. Chris Dodd, chairman of the Senate Banking Committee, accuses the banks of "gouging," saying, "the list of questionable actions credit card companies are engaged in is lengthy and disturbing."
Perhaps he should send the bankers a Bible bookmarked to Deuteronomy 23:19: "thou shalt not lend upon usury to thy brother." Indeed, Sen. Bernie Sanders told me last week that he is working on "anti-usury" legislation.
For their part, the bankers have tried to cloak their behavior with corporatespeak. A Citibank spokesman called the rate hikes the result of "severe funding dislocation," and said, "Citi is repricing a group of customers in our Citi-branded consumer credit card business in the U.S. to appropriately manage these risks." An AmEx spokeswoman chalked up its rate hike to "the cost of doing business."
Making such pronouncements particularly galling is the fact that many of the banks summarily raising interest rates and piling on the penalties have received billions in bailout money. Our money. We gave Citi $45 billion, Bank of America $45 billion, JPMorgan $25 billion, AmEx $3.4 billion, Capital One $3.6 billion, and Discover $1.2 billion. In fact, American Express and Discover converted to bank holding companies to make themselves eligible for bailout funds.*
Yet that money seems to have been delivered with no strings attached. Banks cash their bailout checks, then turn around and gouge their most vulnerable customers. Priceless.
One of the ironies of the credit card crisis is that the financial industry laid the foundation for much of the trouble we are seeing with its full-throated -- and deep-pocketed -- support of the cynically named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a truly loathsome piece of legislation that opened the door to many of the banking abuses we are witnessing. It made it much tougher for Americans to file for bankruptcy -- even the millions of hardworking Americans whose bankruptcy is the result of a serious illness (fully half of all bankruptcies are the result of crushing medical expenses). It also did nothing to rein in the kinds of lending abuses that frequently turn manageable debt into unmanageable personal financial catastrophes.
The financial industry spent $100 million lobbying to get the bill passed -- and millions more in campaign contributions. The result was a sweetheart law for the financial industry -- with 18 Senate Democrats voting for it.
And the banking lobbyists are at it again.
There are currently several bills in Congress designed to roll back some of the worst provisions of the 2005 legislation. In the Senate, Robert Menendez has put forth the "Credit Card Reform Act," and Chris Dodd has introduced The Credit Card Accountability, Responsibility and Disclosure Act ("the Credit CARD Act"). In the House, there is Rep. Carolyn Maloney's Credit Cardholders' Bill of Rights.
The banking industry is pushing back hard. But wait, you might ask, aren't the banks broke? So where'd they get the money to lobby against credit card reform?
From us. There may not be much transparency about the hundreds of billions of taxpayer dollars doled out through the TARP program, but we know where at least some of the money has gone: into making sure that none of the Bankers Gone Wild behavior that led to the current disaster is curtailed.
In December, the Fed approved new rules that will, among other things, limit arbitrary rate increases on credit cards, cap some fees, and require the credit card companies to more clearly disclose the often confusing -- if not downright misleading -- terms customers are agreeing to. But these rules won't go into effect until July 2010.
Why would the Fed make rules that won't go into effect for a year and a half? We can't afford to wait until then.
Congress needs to tell the bankers that their Beltway credit has been denied and pass laws reforming the credit card mess -- before the credit card blaze turns into another economic conflagration.
* An earlier version included Capital One among the companies that had converted to bank holding companies to make themselves eligible for bailout funds. In fact, Capital One became a bank holding company in 2004.
Are you being forced to use your credit cards to make ends meet? Has a credit card company jacked up your interest rate after missing a single payment - or raised your rate even though you haven't missed one? Have you been charged unexpected add-on fees? If so, we want to hear your story. Share it with us by emailing email@example.com.
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