Although it started with mortgage problems, the present economic crisis is much bigger than that. Jobs are being affected, and that means it's going to be hard to pay bills. And then what?
Well, if credit card bills don't get paid, I'm thinking we'll see a lot of credit card rates shooting up. A missed payment can trigger a shift to the “default rate,” which will in many cases push the credit rate so high it's hard to recover from.
And as if that weren't enough, there's the cascade effect of “universal default,” where if this happens on one credit card, you're likely to find other credit cards decide to raise your rates, too.
The credit card companies, after all, are those same banks that are already in trouble for other reasons and they'll want to squeeze the most money out of you that they can before someone else does by exercising their power to change your rates as high as they can.
Of course, charging excess interest used to be illegal.
But in the modern law, protections vary enormously state by state, being huge or unbounded in some cases. This really complicates any kind of national dialog on the matter.
The laws also have weird exceptions. For example, in the United States, in 1978, “national” banks were made exempt from usury laws.
Arguments are made that there are good reasons for allowing really high interest rates—but I don't happen to believe any of them so I won't waste time repeating them here.
Attempts have been made to place national limits on interest rates. Recent bills of interest are:
Protecting Consumers from Unreasonable Credit Rates Act of 2008 (S.3287), a bill to amend the Truth in Lending Act to establish a national usury rate for consumer credit transactions. [This bill sets the maximum annual percentage credit rate at thirty-six percent (36%).]
These proposed laws would begin to address not only the problems with regular credit cards I've mentioned but also the so-called payday loan schemes, which many times more harsh than any credit card.
Reinvigorating the laws against usury is a good first step. It won't totally fix the problem, but it could avoid some potentially bad cases of abuse that are sure to arise as situations become more desperate. But something has to be done now before we see a suddenly worse problem as the economy worsens and people start to miss payments.
After all, when there is a problem, what are the chances that the government is going to dive in and try to renegotiate individual credit cards? I'm guessing low to non-existent. Credit cards are not as glamorous as houses. They sound more frivolous and irresponsible. They aren't about an asset. (Never mind that many of the home loans being rescued probably involve people who have zero equity in their home. At least they were smart enough to look like they have an asset.) So those of us with credit cards are going to be on our own to fend against the credit card companies eager to squeeze that last dollar out of us.
If you got value from this post, please "rate" it.
This is one in a series of posts on credit cards.
Hair-Trigger Credit Card “Default Rates” (6 Oct 2008)
An All-Volunteer Army of Credit Card Users (5 Dec 2008)
Name Your Own Credit Card Rate! (15 Dec 2008)