The Great Credit Card Battle To Come

The next front in the banking wars will be over credit cards. Some of the nation’s biggest bankers — including representatives of Citigroup, JP Morgan Chase, and other recipients of billions of taxpayer dollars — are meeting today with the President to ask him back off his move to reform credit-card lending practices. What’s happening to credit card lending is a smaller replay of what happened to mortgage lending. For years, banks used every gimmick possible to get the public to use their cards — regardless of the credit worthiness of the customer. They lured borrowers with low “teaser” rates. They told borrowers they could get by paying minimum balances.

And now that tens of millions of Americans are poorer than they used to be, the credit-card bubble is bursting. Credit card delinquencies are soaring. At the Bank of America, the largest U.S. lender by assets, 7.8 percent of credit-card accounts were delinquent in February by more than 30 days, up from 5.9 percent last August. Yesterday, Bank of America reported a $1.8 billion first-quarter loss in its credit-card services unit.

As delinquencies mount and profits shrink, card lenders are raising fees and interest rates, including rates on existing balances. They’re also charging higher fees when customers exceed their credit limits, and shortening the duration of the teaser rates. When a customer makes a payment in excess of what’s owed, card companies now routinely apply the excess to balances with the lowest rates rather than those carrying the highest rates. And banks disclose very little of relevance: For example, most customers have no idea how long it will take them to pay off their balances if they make minimum repayments, or what interest they’re actually paying on their balances.As more and more Americans find themselves in the credit-card squeeze, they’re complaining loudly. But the bankers have their own loud lobbyists on Capitol Hill, whose voices haven’t been muzzled despite the giant bank bailout. Last month, the Senate Banking Committee reported a bill that bans rate increases for existing balances, among other things. But the vote was close — 12 in favor, 11 opposed — and its future in the Senate is uncertain. A House bill advanced yesterday, sponsored by Representative Carolyn Maloney, Democrat from New York, has only a fifty-fifty chance of succeeding. Meanwhile, the Fed is working on a set of watered-down reforms scheduled to go into effect a year from July, but that’s way too far off to avoid the pending battle. Enter Obama. The Treasury holds lots of cards given how dependent the big banks are on its solicitude. Meanwhile, the public has grown weary and suspicious of the bank bailouts. Knowing how unpopular the bailouts have become, the Administration is considering how to get additional capital to the banks without going back to Congress for the money. One big idea is to convert taxpayer-provided bank loans into bank equity — even though the swap puts taxpayers at greater risk (after all, loans have to be repaid, but equity can continue to fall). That’s why getting tough on the banks’ credit card lending practices has such appeal for the Administration, politically. It puts the White House on the side of the people rather than Wall Street, on an issue that the public is becoming more and more upset about. And the Administration’s push could be enough to get reform legislation through Congress.

The bankers will tell Obama today that any new contraints on credit card lending will cause the banks to reduce the amount of credit card lending they do, which will hurt the economy. But it’s a weak argument because it presupposes that any lending is good for the economy — even lending to people who don’t know what they’re getting into and can’t repay the loans. It’s the same argument banks used two years ago, when precient observers warned that constraints had to be placed on mortgage lending practices. What may hurt the economy in the short term, we now know, may save it from even larger pitfalls to come.

Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

12 Responses to "The Great Credit Card Battle To Come"

  1. Guest   April 24, 2009 at 8:14 am

    Please excuse the outrage, but WHAT THE F#CK!!! Bankers looking to line their own company pockets continue to use the arguement that we have to make it easy for John Q public to spend credit, and governement, with their own (slightly hidden) self interest goes along. Does anyone care about the general public? Don’t spend, don’t spend, don’t spend. Pay off debt, pay off debt, pay off debt. Wipe out the insolvent banks and let new ones emerge. Yes, we get it that it will be tough times in our economy for a while, but to propagate the self interest spend policies of the last 10 years in CRIMINAL, IMMORAL, and SHAMEFULL. Real people are going to suffer a lot for this self serving, big bank, attitude. How disgusting!!!

  2. Guest   April 24, 2009 at 4:15 pm

    How to screw the banks, but would enough people be ready to do it?If youre not yet over limit on your credit cards, go for it.Then just stop paying, not a single penny. They’ll try all their tricks to make you pay, but if there are 50 millon defaulters it’ll take a lot of time and thy’ll have to write down huge amounts. Now of course you’ll loose your rating, you won’t be able to rent an appartment or a car, to get a mortgage or to buy online, or use checks, even to book a night in a hotel. That’ll help you to save and avoiding debt.But can all the businesses, including banks, that depend on the use of credit cards or a clean credit rating afford to loose 50 million customers?

    • Anonymous   July 18, 2009 at 7:17 am

      My sentiments exactly….I made a very slight mistake in my payment to a cc company recently and realized it paid the rest. Had a perfect record up to that time. They would not drop the late charge. This month I found out that they sent me to almost almost 30 percent interest on the card now. And just recently I found out about the Universal Clause of many companies….if I am correct these credit cards with UC will raise their rates when they see any problem on your credit report!? LETS HEAR SOME NOISE ABOUT THESE COMPANIES THAT TOOK BAILOUTS AND NOW FOLD THEIR ARMS AND REFUSE TO DO ANYTHING WHEN YOU CALL THEM…..I AM NOW ABOUT TO TAKE A VERY BRAVE STEP….WHO CARES ABOUT A CREDIT RATING ANYMORE…………WHY NOT GET IN A POSITION TO HAVE A STRESS FREE LIFE…THESE SAME COMPANIES. KEEP THE WAGES SO LOW FOR REGULAR PEOPLE THAT WHEN ANYTHING GOES WRONG IN OUR LIFE WE HAVE TO DEPEND ON A CREDIT CARD COMNPANY…………YOU REMEMBER THE MILKMAN USED TO BE ABLE TO SUPPORT A FAMILY ON ONE SALARY…

  3. Anonymous   April 24, 2009 at 5:59 pm

    Any government regulations or laws that protect consumers from corporate predators are now, more than ever before, considered to be anti-business, or even communistic. Banks and credit card companies have a well-earned reputation for devious, predatory business practices. Even now that they’ve become dependent on government largesse, these corporate predators are making it known that they have no intention of allowing the government to regulate them.

  4. Mark   April 24, 2009 at 6:04 pm

    Taxpayers are losing the battle with the financial services industry and they have no lobby. Even their representatives in Congress have sold out. The Treasury Department has failed to stem the flow of money to shareholders and creditors and the Fed is “loaning” trillions of dollars to banks and investment companies in exchange for worthless collateral. In any other country there would be a revolution. But Americans are easily deceived, placated, and dumped on.

  5. Anonymous   April 25, 2009 at 10:13 am

    There is no substitute for a cleansing. Everyone of us have made judgement errors thatr we have had to pay for. Remarkably,the quicker we acknowledge the error, take responsive action, the less painful the consequences of the error in judgment. This universally experienced truth seems to have been avoided by Bush, Paulson, Bernankee and now Obama. The sooner these “enron” like banks are shuttered the better off this generation and the next three generation of Americans will be.

  6. Guest   April 25, 2009 at 4:21 pm

    Credit card money is simply the money the power structure has stolen from the public. So take it back–max out your cards and then tell them to phuck themselves. You’ll see by August that the economy is collapsing.John Ryskamp

  7. Anonymous   April 26, 2009 at 4:35 am

    “The bankers will tell Obama today that any new contraints on credit card lending will cause the banks to reduce the amount of credit card lending they do, which will hurt the economy.”These claims by the banking/credit card lobby are a joke. As has always been the case, “business” people actually need to be protected from their own greed by consumer protection regulation. If credit card companies were primarily concerned about doing business with credit-worthy customers, they would seriously compete for customers who conduct as many transactions as possible with their credit card and pay their balance in full every month, delivering steady, reliable income. These customers are labelled “deadbeats” by the credit card industry.The most profitable credit card customers are those who have multi-thousand dollar balances (typically covering the gap between shrinking incomes and the ever rising cost of living) being squeezed with obscene interest rates and fees. The stats I have seen indicate that the average credit card customer owes thousands of dollars on their revolving balance. Excluding those drowning in unforseeable medical debt, the vast majority of people anticipate and expect to be required to pay their credit card debt, particularly when their debt is fairly priced with equitable interest rates.Unfortunately, the credit card business has been allowed (slowly at first during the Clinton administration, then with a rush throughout the Bush administration) to engage in parasitic “Crack Cocaine Economics”, building a business model that intentionally seeks to entice customers (particularly those in fragile financial situations) to accumulate excessive revolving debt, at which point said customers are abused with universal default, constantly rising interest rates (even while interest rates for the banks have been artificially maintained at extremely low levels) and garbage fees, unannounced credit limit cuts and accompanying over-the-limit penalties, etc. Credit card companies regularly attempt to convince me to write checks against my available credit, which immediately establishes debt at a ridiculous interest rate with no grace period. This is not a service. This is an unsolicited financial bomb ticking in my mailbox. Deep down, we all know from personal experience and from the experience of our friends, relatives, co-workers and acquaintences that this disfunctional, out of control monster of a credit system with its disasterous lack of limits on interest rates needs major re-regulation and interest rate relief for overstretched consumers. The 20-30% interest rates need to be forced down into a ~15% range or we will see even more consumer-dependent businesses go down the tubes as people become ever more fearfull of making any non-essential expenditure AND as swelling numbers of people despair of ever paying off their debts due to job loss and/or interest hikes, and cease making payments in massive numbers.

  8. Guest   April 26, 2009 at 12:49 pm

    HAHAH Reich, I guess YOU even admit that the Tea Parties were NOT “astroturf”And I quote from Reich:”Enter Obama. Meanwhile, the public has grown weary and suspicious of the bank bailouts. Knowing how unpopular the bailouts have become, the Administration is considering how to get additional capital to the banks without going back to Congress for the money.”Obviously, as much as you want to dismiss Tea Party Attendees as a bunch of right wing racist extremists, you cannot.So I guess I should be happy that even Reich has finally acknowledged that the bloom is off the Obama honeymoon.BTW, us Tea Party non-right wingers would like you to know that trying to pacify us with better credit card rates is not going to pacify us.But good luck trying ;)

  9. Guest   April 26, 2009 at 12:50 pm

    Oh, and I think the ONLY way for Americans to get their money back from the thieves involved in TARP and the current administration is to DECLARE BANKRUPTCY EN MASSE!

  10. Anonymous   May 1, 2009 at 7:11 am

    All the talk lately has been about Americans’ overload on debt, such as ‘option-ARM mortgages’, etc. But the worst of the debt may be credit card debt, where the controls on interest rates and penalty charges were lifted long ago and the government stopped providing a tax deduction for interest paid. In many cases, interest on credit cards is 28 percent or more, which means that even by making the minimum required payment, consumers see their balances grow each month. That the politicians could continue to allow such evil to exist is astounding but proves who their masters are.So until real relief is forthcoming, citizens who are in distress should simply destroy their credit cards and stop paying the monthly bills. People are already doing this.How to do this? Just tell the credit card company you cannot pay. Ask them to write off some or all of the debt, and if they want to take you to court, go on your own and defend yourself. You don’t need a lawyer, and you don’t need anyone’s permission. You also don’t need to go through the horrendous “reformed” bankruptcy system the credit card companies got Congress to pass in 2005. Failure to pay credit card debt is not, thank God, a crime in this country, and there are no debtors’ prisons—yet.Besides, if people do not pay credit card debt, that money remains in circulation. So default is actually a form of patriotism in today’s trying circumstances. And the credit card companies really don’t lose anything, since the money didn’t exist before they lent it to people who are now broke.