Does the Credit Card Industry Need to be Regulated?

Hello, and welcome to Your Money 2.0. I’m Thomas Fox, Community Outreach Director
at Cambridge Credit Counseling. A few episodes ago, we talked about some dramatic
new rules that the Federal Reserve had created in an effort to reform credit card policies. Those rules are set to take effect in July
2010, however, Congress and the Obama administration are striving to enact legislation that would
be in place much sooner than that. To head off the banking industry’s objections
to the proposed law, President Obama recently summoned 14 credit card executives to the
White House. His message? “The days of ‘any time, any reason’ rate
hikes and late-fee traps have to end.” The recent problems within the credit card
industry remind me of a story a colleague shared with me several years ago. It involved a student in his first day of
a college business class. When the professor asked a simple question,
“What is the first duty of a business?” most of the students, who were young and eager
to make a strong impression, answered, “ To make a profit!” “Wrong,” stated the professor. “The first duty is to provide a good or
a service. The quality of your good or service will determine
the revenue you earn. Continually improving that good or service
will maximize your position in the marketplace, yielding further revenues.” One could argue that bankers have continually
improved their product to make it more user-friendly: after all, millions of merchants all over
the world accept credit cards; you can make purchases by card on the Internet regardless
of the time of day; and, eventually, we may live in a cashless society. In the face of today’s uncertain economy,
however, many lenders seem to have retreated from the basic principles taught in business
school. Rather than catering to the needs of their
customers and improving their products, they’ve instituted policies that are decidedly consumer-unfriendly. What brought us to this point? Most consumers manage their credit responsibly,
but the struggling economy has forced many Americans to rely more heavily on their credit
cards, with predictable results. At the end of 2008, a record 5.6% of all credit
card accounts were 30 days late. Credit card charge-offs- that is, accounts
considered uncollectible – had risen to 6.3%, the highest mark since the first quarter
of 2002. Industry experts predict that delinquencies
and charge-offs will continue rising for at least another year. As you might imagine, this increased level
of risk has provoked a reaction in the credit card industry. Unfortunately for consumers, rather than refining
their business models to remain competitive in the marketplace, many lenders have responded
by raising fees and interest rates in an effort to boost sagging revenues. These increases are expected to generate a
record $20.5 billion in fee revenue for credit card issuers in 2009. Let’s look at what a rate hike might mean
for an average cardholder. Let’s say an individual had an interest
rate of 9% and a balance of $2,000 on her card at the time she missed making a single
monthly payment. Without warning, her creditor raises her interest
to a penalty rate of 32%. If the interest rate hadn’t changed, she
would have paid her lender approximately $2,500 over a few years. At the penalty rate of 32%, she’ll repay
approximately $13,200 over a few decades. Policies like these have compelled Washington
to intervene on behalf of consumers. I encourage you to follow this story as it
unfolds over the coming months. Well, that’s it for this edition. We welcome your feedback and ask for your
thoughts and suggestions by e-mailing us at [email protected] Thank you for watching. Until next time, I’m Thomas Fox for Cambridge
Credit Counseling.

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