Better credit card rules for consumers

Wednesday, September 1, 2010; A16

AUGUST BROUGHT the phase-in of the last new credit card regulations under the Credit Card Accountability, Responsibility and Disclosure Act, also known as the Credit CARD Act, which was passed by Congress and signed by President Obama more than a year ago. Among other things, the new rules ban credit card companies from charging fees that are larger than the infraction: If you miss a $20 payment, the maximum penalty is $20. Thus, the finishing touches are on a revamped credit card regulatory structure that will also require issuers to apply any payment over the minimum due to the highest interest portion of a customer's debt and make it harder for companies to market plastic to students under 21. Between 1989 and 2006, total credit card charges increased from $69 billion a year to more than $1.8 trillion. But now, those go-go days are over.

Critics call the CARD Act a nanny-state infringement on economic freedom whose negative impact on the economy has only begun to be felt. If credit card issuers can't recoup the costs of extending credit to more marginal card users, they will have no choice but to raise interest rates on everyone else. And, sure enough, the average rate on credit card debt has risen to 14.7 percent -- a post-2001 high -- when other interest rates, such as the 30-year home mortgage rate, are falling. No wonder consumer spending is sluggish. It's another made-in-Washington setback for the recovery.

Or is it? The excessive extension of credit to riskier and riskier segments of the borrowing public was partly responsible for the huge bubble of debt that burst in 2008, bringing on the recession. Most of that was housing-related, but credit cards were also an important factor in building up total U.S. household debt to a peak of 138 percent of disposable income just before the crash. Households were inevitably going to have to deleverage with or without the CARD Act. And there are signs that this painful but necessary process is going relatively well: Credit card losses are falling faster than the unemployment rate, according to a recent report by Moody's. Meanwhile, the credit card companies are back in the black.

In short, the consumer-credit business is being put back on a more sustainable basis. And in the new world of the CARD Act, it is less likely that the business can easily return to the days when card issuers attempted to extend every last dollar of credit to every single borrower they could squeeze into a "risk-based pricing" formula. Yes, all federal limits on credit are, to some extent, arbitrary. And yes, the CARD Act may therefore prevent consumer spending from resuming all of its former status as the engine of U.S. economic growth. But it also means that more people will have to save more money before they buy. And that's hardly the end of the world.

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