Obama Calls for Credit Card Reform
Bipartisan Effort to Protect Consumers from Aggressive Tactics
May 14, 2009
The President and Congress are working to create a bill aimed to protect consumers. The president has asked congress to submit the bill for his signature before the Memorial Day recess. Early indications are that the bill has broad bipartisan support. Several of the provisions in the bill include:
- Monthly statements will be in larger print and written in simple language
- Teaser promotional rates will have to last at least six months
- The initial standard interest rate cannot increase for one full year
- Proof of ability to make payments will be required for consumers 21 years old and younger, either by the consumer or his or her parents
- Any interest rate increase must have a 45-day notice
- Statements must be sent no later than 21 days before payment is due
U.S. Credit Card Debt
Part of the incentive for passing a credit card reform may be related to the amount of consumer debt along with high interest rates and fees. Current credit card debt in the U.S has risen to $963 billion as of January 2009, with 44% of families carrying a balance on their credit card. Traditional age college students, who will be affected by the new regulations, carry an average balance of $3,173 according to a study by Sallie Mae. The study also revealed that 40% made charges on their credit cards that they knew they did not have the money to pay.
Bankruptcies on the Rise
Stronger regulations on credit cards could curb future bankruptcy filings. According to the National Bankruptcy Research Center, U.S. consumer bankruptcy filings in April, of 125,618 represented an increase of 36% from the same month last year and a 3.5% increase from March 2009. The total estimated number of bankruptcies predicted for 2009 is 1.4 million.
Possible Negative Effects
Some industry groups argue that increased regulations will lead to higher interest rates and lower credit lines, which could have negative effects in a recession. To assure the credit markets of the true intention of the reform, President Obama stated, “We don’t begrudge a company’s success when that success is based on honest dealings with consumers.”
Credit card companies will have some time to implement the changes and update their risk models. The regulations are not expected to take effect until nine months after the bill is signed into law. Consumers may see interest rates increase and total available credit decrease before the bill becomes law.
Sources:
Fox News: Thursday, May 14, 2009.
Reuters: http://uk.reuters.com/article/marketsNewsUS/idUKN1449984520090514
Reuters: http://www.reuters.com/article/topNews/idUSTRE54D4P420090514
Sallie Mae: http://www.salliemae.com/about/news_info/newsreleases/041309.htm
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