WASHINGTON—Studies indicate that credit card defaults and related write-offs increased drastically since 2006. Today, lenders write off 33 percent more in credit card debt than they did two years ago.
Statistics show that about 35 percent of all credit card holders are already exhibiting signs of possible default. Late credit card payments result in fees many consumers can't afford.
Credit card debt accelerated to unprecedented heights since bank loans began to dry up due to mortgage defaults. Total U.S. credit card debt reached almost $800 billion in November 2007, up from around $680 billion in March of last year, according to the latest available government statistics.
In the aftermath of the U.S. mortgage crisis, the credit card bubble may be next to burst. In the past few years, banks have aggressively marketed credit card ownership and usage to consumers with limited income and low credit scores. Credit card standards remain lax, while loan standards have tightened to a degree.
More than 50 percent of senior loan officers said in a January 2008 Federal Reserve survey that they performed a more rigorous analysis before approving a mortgage or car loan over the prior three months. Only 14 percent said so in a mid-2007 survey of the same nature. Banks and lenders have tightened their lending standards following the collapse of the subprime market.
With borrowing venues drying up, American consumers may be drawn to credit card debt, creating defaults similar to those in the mortgage market. Credit card debt—much like mortgages—are bundled and sold by investment banks as asset-backed securities.
The Next Credit Crisis?
"Rising credit card debt since April 2006 amid the decrease in the mortgage expansion rate resulted in a substantial shift to credit card borrowing from mortgage debt," according to a recent report titled "House of Cards: Consumers Turn to Credit Cards Amid the Mortgage Crisis, Delaying Inevitable Defaults." The report was published by the Center for American Progress (CAP), a nonpartisan Washington, D.C.-based research institute.
The rules of the credit card game usually aren't transparent and are difficult to follow even by many sophisticated consumers. Just take any credit card agreement: Caveats are written in difficult-to-understand "legalese." Words like "late fees, annual fees, over-limit fees, cash-advance fees, balance-transfer fees, annul fees, setup fees, fees to pay balance by telephone," and so on, are confusingly sprinkled throughout the contract.
"Credit card debt tends to carry substantially higher costs than other forms of credit, due to myriad fees in addition to high interest rates. The result is that many borrowers unwittingly slide deeper and deeper into debt as they fall prey to the lack of transparency in credit cards," said CAP staff.
"Double-cycling" billing is one of the most abused features by some credit card companies. For example, the cardholder charges $500 to the card, then repays $400 and leaves a $100 balance on the card. In "double-cycling" billing, the interest charge accrues not only on the $100 balance, but on the full $500 for the month. The terms are hidden somewhere in the initial credit agreement.
Students Most Vulnerable
University students are the most vulnerable victims of unscrupulous credit card tactics, according to a survey conducted between October 2007 and February 2008 by U.S. Public Interest Research Group (PIRG), a Boston, Mass.-based public interest advocate.
The study found that 66 percent of surveyed students have a credit card, 55 percent rely on credit cards for their daily needs and school supplies, and 30 percent have their charges paid for by their parents.
About 74 percent of surveyed students want credit card companies to curtail their marketing practices and establish monthly limits on how much the students can charge. They also would like universities to stop providing personal information—such as home address, e-mail address, and phone numbers—to credit card companies.
Credit card companies also offer student event funding and other "freebies" to campus associations and students.
Students are beginning to fight back and file complaints through legal and other venues because of "cards with unfair terms or 'tricks and traps' that result in massive penalty fees and the imposition of punitive interest rates at APRs [annual percentage rates] as high as 36 percent or more," according to the PIRG report.
The report included a solicitation letter from a credit card company to The University of Iowa Alumni Association playing on the emotional side of the student in the first sentence: "Imagine the convenience of being able to purchase supplies for your classes, without worrying about carrying a lot of cash."
The University of Iowa alumni leaders told PIRG that they earned around $1 million annually from Bank of America in credit card purchases by their members. They turn over $200,000 to the university; however, "some of the money given to the school is payment for $145,600 worth of football tickets used by Bank of America Representatives and others."
Taking Action Against Predatory Marketing
Sen. Robert Menendez (D-NJ) initiated legislation in March 2008 called "The Credit Card Reform Act of 2008" that aims to stop predatory credit card marketing. So far, 11 consumer groups and unions have co-signed a letter in support of this legislation.
"We cannot allow predatory and deceptive practices in the credit card industry to continue as we did in the subprime mortgage market. We cannot allow the credit card problem to become the next foreclosure crisis," said Menendez in a press release.
Rep. Carolyn Maloney (D-NY) and Rep. Barney Frank (D-Mass.), the chair of the House Financial Services Committee, introduced H.R. 5244, the "Credit Cardholder's Bill of Rights" in February 2008.
New York Attorney General Andrew M. Cuomo charged First Premier Bank, based in South Dakota, with credit card fraud and fined the bank $105,000 in penalties last year. This bank also must make $4.5 million in restitution payments to customers it defrauded through its credit card program.
Ohio Attorney General Marc Dann went after Potbelly Sandwich Works, Citigroup, Inc., and Elite Marketing Group, Inc. for deceptive credit card practices on college campuses.