New rules or not, consumers pile up debt with credit cards

Embedded in the stories regarding legislation that became law two weeks ago, were some statistics I found interesting. Given the heightened interest among the general public with regard to the amount of the national debt, U.S. household credit card debt nearly tripled from 1992 to 2008. The average American household has nine credit cards with an average total balance of $10,691. Since credit card interest rates are typically significantly higher than the rate paid by U.S. Treasury Bonds, it would seem that there is a lot criticism coming from people who do not practice what they preach.

I guess that is not surprising since Americans have something of a complicated relationship with credit cards. People love their plastic, but believe the companies who issue them their cards engage in practices that are unfair and at times deceptive. The legislation was spurred by complaints from the public regarding the practices of credit card companies. The law that went into effect Feb. 22 will outlaw some the more controversial practices and will require credit card issuers to give advance notice of significant changes in the terms of their account. Customers will have the right to close their account if they disagree with the new terms.

There have been rampant reports of overly aggressive credit card companies issuing cards to people who should not have them, including minors. But the new law prohibits some of the practices companies use on existing customers. Now, companies will no longer be able to raise the interest rate on existing balances. For instance, if a customer has a balance of $1,000 at an interest rate of 12 percent, the company cannot not raise the rate on that balance even if their interest rate changes. This protects clients from making purchases on their credit card at one rate and paying for them at another. Or to put it another way customers will no longer experience drastic interest increases on money they have already borrowed. Another provision in the law prohibits credit card companies from raising the interest rate on a new credit card account for 12 months.
Credit cards have become so ingrained in our culture it can be difficult for consumers to function in commerce without one. Carol and I signed up for our first credit card when we were no longer able to secure a rental car without one. The rental car companies will not accept checks, cash or a note from your banker or minister. It is particularly cumbersome when arranging to bring potential employees into town for an interview. One has to be very deliberate and explicit with instructions to them that although the company will be paying the bill, they must have a credit card to pick up the car. The same has become the case with hotels. They want an imprint of a card to cover “incidentals.”

As easy and efficient as plastic has made purchasing goods and services for consumers, it has made it even easier for them to borrow. If the credit card holder only makes the minimum payment and does not pay off the entire amount, they have essentially taken out a loan. The interest rate on the credit card only comes into play if there is a balance at the end of the payment period. That did not change with the new provisions in the law. Credit card companies will still be able to charge annual fees for having the use of the card and inactivity fees if you do not use it often enough.

Many borrowers have several lines of credit with different interest rates on the same card. For example, one may have one rate for cash advances, another rate for purchases and still another for a balance transfer. Prior to the new law when borrowers sent in a payment, issuers usually applied the entire amount to the balance with the lowest interest rate. Under the new provisions, the issuers will have to apply any amount greater than the minimum payment to the balance with the highest rate.

The new credit card law offers consumers more protection than they have had, and more clarity on what they are actually paying. However, it seems to me the distinction they need to focus on is that they are borrowing money and paying dearly for it. The financial responsibility principle applies to the household budget as it does to the government.