Released: July 30, 2008

‘Forever in Debt’ report targets credit card practices

Source: Rep. Carolyn Maloney (D-NY)

Congresswoman Carolyn B. Maloney (D-NY), Vice Chair of the Joint Economic Committee and Chair of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, today released a report finding that inadequate regulation of the credit card industry could push more families into bankruptcy, dampen consumer spending in the downturn, and create broader financial market risks from the securitization of the debt.  Rep. Maloney’s Credit Cardholders’ Bill of Rights (H.R. 5244) is slated for an historic mark-up in the House Financial Services Committee later today, which will be the bill’s final hurdle before a full vote in the House of Representatives.

Click here to download the report in PDF format.

Rep. Maloney said, “Another financial crisis spurred by inadequate regulation is looming as families using their credit cards to make ends meet struggle to cope with high interest rates and hidden fees.  Families with credit card debt will spend more of their paychecks servicing their debt, instead of making new purchases to boost the sagging economy.  If unfair practices by credit card companies are allowed to go unchecked as subprime mortgages were, it will have far reaching effects for families and the economy.”

Maloney’s report, Forever in Debt: Anti-Competitive Credit Card Practices and their Impact on the Economy, finds:

- Innovations in financial instruments may have led to complex debt instruments that borrowers cannot fully understand, making it more important that consumers are protected from unfair practices by credit card companies;
- Credit card company practices - such as penalty interest rates, universal default provisions, “any time, any reason” changes in interest rates, and double-cycle billing - may actually increase personal bankruptcy rates;
- The effects of greater indebtedness will spill over into the broader economy, as families divert more of their income to servicing their debt, instead of boosting the economy with new purchases;
- The securitization of both mortgage and credit card debt means that problems are not contained in these sectors, but rather have a broad impact on financial markets; and
- Consumer debt financing is not a sustainable way to grow the economy.

Broad pieces of legislation have been introduced by the Congress and federal government to address these concerns.  In addition, Federal Reserve Chairman Ben Bernanke recently highlighted the need to reform unfair and deceptive credit card practices.

Academics who have done research in this area concur with the findings in Rep. Maloney’s report:

Prof. Lawrence Ausubel, Professor of Economics at the University of Maryland, said, “In the current environment, lenders have every incentive to compete to pile on the highest penalty interest rates possible in the shortest time after payments on any debt are late.  This relentless cycle of punitive pricing is clearly bad for consumers, and is also bad for lenders, who find there is nobody left standing to pay the bills.  By limiting the use of penalty interest rates, this legislation will help to relieve the aftermath of the current financial crisis and help to lay a sound foundation for the future.”

Dr. Joseph R. Mason, Professor of Banking, Louisiana State University and Senior Fellow, The Wharton School, said:  “Right now, we can’t lose sight of the important shortcoming in the non-mortgage credit world, lest we forget that for all the weaknesses illustrated in the mortgage sector, many – possibly far worse – practices are common throughout the consumer credit industry.  Consumers need to be able to choose from an adequate array of credit products that they can use wisely and efficiently without subjecting themselves to the hard-sell tactics and follow-on abusive practices now so common in the industry.”

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