Many Americans are walking around with ticking time bombs in their pockets — in fact, the bombs have already exploded in many cases. Not real bombs, but credit cards that are near their borrowing limits or in default. The Federal Reserve has taken the first step in defusing that threat to individual consumers and the overall economy.
The Fed, under Chairman Ben Bernanke, is proposing a number of reforms that would curb the predatory excesses of some credit card issuers. Relief can't come too soon.
Americans owe more than $800-billion in credit card debt, and more than 1 in 3 cardholders is unable to make timely payment on accumulated balances. That means lenders tack on more fees, causing a snowball effect that pushes more borrowers toward default. Target stores wrote off more than $55-million in credit card debt just in March, and even stalwart American Express reported a 6 percent decline in profits tied to card defaults.
What is troublesome for banks can be tragic for families. With falling home values, stagnant wages and rising prices for basics such as food and fuel, Americans are relying more on credit cards to pay for necessities. Some lenders have taken advantage of that situation by bumping up fees and interest rates on credit cards, even for those who pay on time.
Rules proposed by the Fed would stop some of the worst abuses. Among the protections: Card-issuing banks would be prohibited from increasing the interest rate on existing balances without full and clear disclosure, and then only if a teaser rate expires or payments are more than 30 days late. Banks would have to allow a reasonable grace period for payments without fees and be prohibited from applying payments in such a way as to increase interest charges.
Banks commonly offer a low initial interest rate and apply payments to the balance subject to that rate while allowing the amount carried over to accrue at a higher interest rate. That would no longer be allowed.
Predictably, the banking industry opposes such reform, with the American Bankers Association calling it "an unprecedented regulatory intrusion into marketplace pricing and product offerings."
Fine. Somebody needs to regulate a marketplace that is out of control, takes advantage of the most naive and vulnerable consumers and is threatening an already fragile economy.