Tim Westrich on Credit Card Debt

Has the economic downturn affected Americans' credit card use?

In an economy like this where prices have gone up so high and incomes really haven't risen over the past several years, families are increasingly turning to credit cards and other types of debt to make up for the squeeze that they're in. Over the past several years, we've seen that food prices have gone up 25 percent; fuels and utilities have gone up 50 percent; the cost of transportation and health care on the rise also. So, to make up for the income that they're not receiving and the rising prices, it's no wonder that families are turning to debt to finance their everyday expenses.

Is credit card debt more harmful than other types of debt?

Credit card debt is more expensive than other types of debt such as getting a loan against your home equity. Credit cards generally have higher rates because it's an unsecured type of loan, and credit card debt can be very risky when you're talking about being late once or a couple of times, not only do you get slapped with a fee, but also the lender can raise the rate, often to 25 or 30 percent, and it's very difficult to pay off debt with a rate that high. And what we're seeing also recently is with the mortgage market cooling off, lenders are tightening their standards for loans against home equity. So with that spigot of borrowing taken away, consumers are instead turning to credit card debt, and we've seen credit card debt rise very quickly since about the midpoint of 2006.

Can we protect consumers from falling too deeply into credit card debt?

Well, consumers certainly want better terms and conditions on their credit cards. In a recent poll, three out of four Americans said that they'd like to see Congress and the Federal Reserve more closely regulate credit cards. Currently, the Federal Reserve has out a proposal that would more clearly define when an issuer can raise the rates on a consumer, and more clearly defines when a payment is considered late. And 56,000 people submitted comments to the Federal Reserve, which blows away their record for comments submitted for a regulatory issue like that. Also, Congress has just passed out of the House Financial Services Committee a bill—the Credit Card Holders bill of Rights Act—which is a bit stricter than the Fed rule, and it looks like it might not have enough time to get passed by the House or the Senate, but it's also a good bill that we're seeing in Congress right now.