NEW JEC REPORT: CREDIT CARD BILL OF RIGHTS WILL AID ECONOMIC RECOVERY
Chair Maloney: “Unfair Credit Card Company Practices Are Squeezing Consumers and Undermining the Recovery”
Current Credit Card Provisions are Deceptive, Anticompetitive, and Standing in the Way of Economic Recovery
Washington, D.C. – Congresswoman Carolyn B. Maloney, Chair of the Joint Economic Committee (JEC), and Senator Charles E. Schumer, Vice Chairman of the JEC, released a report showing unfair credit card practices are sending American families further into debt and undermining the economic recovery. The report, “Vicious Cycle: How Unfair Credit Card Company Practices Are Squeezing Consumers and Undermining the Recovery,” outlines how the economic downturn and financial crisis have accelerated the adverse impacts of these practices on consumers, small businesses and our economy as a whole.
Chair Maloney: “The evidence is clear, consumers need protection from the unfair, deceptive and anticompetitive credit card companies’ practices. As families struggle to make ends meet, these unchecked practices reduce the amount of money that families have to spend on new purchases because they are servicing their old debt. This report shows why the Credit Cardholder’s Bill of Rights is essential to assisting our economic recovery. I proudly look forward to the day President Obama signs my bill into law.”
Vice Chairman Schumer: “This latest JEC report is further proof of why we must pass the credit card legislation that is before the Senate this week. Credit card issuers cannot be allowed to continue to pay for their own poor business practices on the backs of average American families. In this record-low interest rate environment, it is indefensible for card issuers to be charging struggling American families record-high interest rates, and their attempts to do so explain why so many people are so angry at credit card companies. Families already straining to make ends meet should not suddenly be required to fork over more of their hard-earned money to credit card issuers because of unexplained rate increases and questionable fees.”
Highlights from the “Vicious Cycle” Report:
• As credit cardholders and small businesses struggle in the economic downturn, significant increases in credit card interest rates have the same impact as price increases, further depressing demand for goods and services (and economic recovery). The average interest rate on credit cards went up a full percentage point from the fourth quarter of 2008 to February 2009, even though the Federal Reserve’s targeted federal funds rate – the cost of money for the banks – was lowered to between 0 and .25 percent on December 16, 2008.
• Like subprime mortgage lenders, credit card issuers have been seeking to maximize their profits by lending to those who are financially vulnerable and then spreading the risks by selling off securities based on credit card receivables. But as charge-off rates increase and the supply of credit falls because of the financial crisis, credit card companies have increasingly made up losses by raising interest rates to all borrowers, effectively charging creditworthy borrowers to make up for growing deficits.
• Creditworthy borrowers cannot simply switch to a new card when confronted with abusive practices because the unfair, deceptive, and anticompetitive practices identified in the legislation increase costs to card users of searching for and switching to a new card. These practices, which are nearly universal in the credit card industry, trap cardholders in a cycle of debt.
• A growing share of consumers’ disposable income, which largely determines consumer spending, is being diverted to service credit card debt rather than to help economic recovery. As of March 2009, U.S. revolving consumer debt (almost entirely credit card debt) was about $950 Billion. In the fourth quarter of 2008, 13.9 percent of consumer disposable income went to service this debt.
• As household wealth has declined in the downturn, more American families are facing financial distress due to high debt burdens. In 2007, before the recession began, 14.7 percent of U.S. families had debt exceeding 40 percent of their income.
• Personal bankruptcy rates were up almost 30 percent in 2008. Penalty interest rates, which raise interest rates on balances by 15 percent or more, can trigger bankruptcy on financially constrained families.
The Joint Economic Committee, established under the Employment Act of 1946, was created by Congress to review economic conditions and to analyze the effectiveness of economic policy.
www.jec.senate.gov
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