SOURCE: AP/Dennis Cook
The Federal Reserve Board today is expected to release new rules that prohibit “unfair and deceptive acts and practices” on Americans’ credit cards. And on Capitol Hill, there’s positive signs that efforts to create a fair marketplace for credit cards are materializing.
The House Financial Services Committee is moving forward on the Credit Cardholders’ Bill of Rights Act, introduced by Rep. Carolyn Maloney (D-NY), and a strong bill was introduced earlier this week in the Senate by Sen. Chris Dodd (D-CT). The Federal Reserve and Congress cannot afford to waste this golden opportunity to implement ways for Americans to avoid becoming trapped in a credit card “hell” of cascading and unsustainable high-interest debt.
These improvements could not come at a better time for American families: More and more Americans are racking up record levels of credit card debt to make ends meet. According to the most recent data from the Federal Reserve, Americans’ total credit card debt has reached $951.7 billion—up 8.2 percent from a year ago, and the highest amount ever recorded. With family budgets squeezed even tighter by the increased costs of gasoline and food—in addition to already declining home values and fewer job opportunities—credit cards offer a convenient but dangerous pressure valve.
The new rules proposed by the Federal Reserve would regulate a host of practices that the Fed deems "unfair or deceptive." These include raising interest rates on debt that has already been charged, and assessing late fees when consumers are not given a billing statement within a reasonable amount of time to make a payment. Further, when different interest rates apply to different balances on the same card, companies would be prohibited from applying a payment first to the balance with the lowest rate. These proposed rules are the most aggressive effort in many years by the Federal Reserve to create a fairer marketplace for consumers.
Regulators and Congress cannot waste this opportunity. Congress has been known to shy away from tough issues such as credit cards in an election year. And the Federal Reserve is now famous for arriving at the fight too late to make a difference in the case of home mortgage rules and regulations, and for not taking on the worst abuses in the first place.
Americans deserve better when it comes to the important issue of not having to tap usurious credit card debt.
In a bad economy, credit cards will be relied upon more and more. Americans can’t afford for the Fed and Congress to step up to the plate and then strike out.
The Fed and Congress need to make these improvements not just for consumers’ sake, though, but also for the sake of capital markets. Capital markets can ill afford a wave of unanticipated losses on credit card debt. Already, the share of credit card debt that is written off by banks has risen sharply. According to the recent Center for American Progress report, “House of Cards,” over a period of 18 months from 2006 to 2007, the share of credit card debt that was charged off by credit card lenders rose from 3.0 percent to 4.0 percent.
There are billions of dollars of securitized debt backed by credit card receivables that could unravel as a result of defaults on credit cards, just as the market in residential mortgage-backed securities has unraveled as a result of defaults on mortgages. The Federal Reserve, which acted too late to avoid the subprime mortgage crisis, hopefully sees the advantage in acting now before credit card defaults affect the value of credit card-backed securities.
With the momentum turning toward better protection for consumers, regulators and lawmakers have a unique opportunity to empower consumers to make smart choices on their own at a time when there are major dangers ahead.
Tim Westrich is a Research Associate at the Center for American Progress and the co-author of our most recent report on credit-card lending, “House of Cards.”
For more on this topic, please see:
- House of Cards: Consumers Turn to Credit Cards Amid the Mortgage Crisis, Delaying Inevitable Defaults
- Credit Card Crash Test
- Watch the video for the event, "Avoiding the Pitfalls of Credit Card Debt"
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