By Bonddad
bonddad@prodigy.net
For the last two years I have been writing about -- and complaining about and warning about -- the massive amount of debt in the US economy. Now that we have Democrats in the majority it looks like we are finally going to get some action on the more questionable credit card practices. The Senate Banking Committe is holding hearings on various credit card industry practices. Below are some of Senator Dodd's opening statements.
Let's look at some raw numbers.
Credit card use has grown dramatically over recent years. Over 640 million credit cards issued by more than 6000 credit card issuers are currently in circulation. Between 1980 and 2005, the amount that American consumers charged to their cards grew from an estimated $69 billion per year to more than $1.8 trillion.
Let's simply think about those figures for a minute. Assuming a population of 300 million and say 20%-25% under the age of 18 (although that doesn't mean the kids don't have cards) that at least 2 cards per person, and probably more. I think it's safe to assume that every American who could have a credit card has one. In other words -- credit is readily available to everyone.
The present level of credit card debt in the United States is at record heights. Total consumer debt in America is nearly $2.4 trillion. Out of that, $872 billion is revolving debt, which is essentially credit card debt. The average American household has over $9,300 worth of credit card debt. Let me repeat that. The average family living in the United States has over $9,300 of credit card debt. In comparison, the median household income was about $46,000 in 2005.
Additionally, Americans have never paid more in interest, paying nearly 15 percent of their disposable income on interest payments alone, despite the current historically low interest rate environment.
It's about time someone in a position to influence policy started to talk about debt, because it is the engine of the current US economy. The average American has credit card debt equal to 20% of national median income. That's before we get into mortgage debt (which is another story altogether). That's a ton of debt. And that's the average. That means there are cases out there that are far worse.
In addition, Dodd makes a great point about regardless of the current record low interest rate environment, Americans are sending 15% of their income to credit card companies in the form of interest payments -- payments that do nothing to reduce the principal amount of their debt. That is a pretty scary figure.
Another area which I believe deserves examination is the massive increase and targeting of credit card solicitations. According to the Federal Reserve, an estimated 6.05 billion direct mail solicitations were sent by credit card issuers in 2005 alone.
Many of the solicitations target students, persons currently on the economic edge, senior citizens on fixed incomes, and persons who have recently had their debts discharged in bankruptcy. I have long believed that we have an added responsibility to protect the most vulnerable in our society – and I believe that examining the targeting of these groups is critically important.
OK -- here we get into a very tricky area where we have to balance personal responsibility with corporate responsibility. Yes -- people have to be responsible with their money. However, consider a person on limited income who suddenly has a really big medical payment. At the same time, they receive a credit card application. Don't think it can happen? Well -- according to the Federal Reserve statistic cited above every US resident received one credit card solicitation by mail per month in 2005.
It's also easy to see the following chain of events. Companies deliberately target vulnerable consumers who run up tons of debt and then the same companies ram rod a bankruptcy "reform" package through Congress that literally makes indentured servants out of credit card holders.
Short version -- this is a story that cuts both ways.
I also have concerns with the amount, type, and disclosure of certain fees imposed on consumers. Over the past 2 years alone, the amount of money generated by credit card fees has simply skyrocketed. In fact, the term ``skyrocketed'' may be something of an understatement.
Banks are expected to collect a record $17.1 billion from credit card penalty fees from 2006, a 15.5% rise from 2004 (according to R.K. Hammer, a bank-advisory firm, as cited in USA Today). This is a tenfold increase from 1996, when card companies raised $1.7 billion in revenues from fees.
We need to take a close look at these fees and how they fundamentally impact consumers.
We must closely examine the current disclosure regime. The current system of disclosure is outdated, has not kept pace with the variety of credit card practices, and consumers have little understanding of the terms and conditions of their credit card contracts. Despite the significant work of many– including a number of the members of this Committee-- to provide consumers with clear, understandable, and consistent information, consumers are increasingly becoming confused and intimidated.
Ah yes -- those credit card fees. Miss one payment and the interest rate goes to 30%+. That's a scenario that has happened to practically everybody I know. And the actual Credit Card disclosures on these topics are at best poorly written.
n addition, the OCC issued an advisory letter in September 2004 to alert national banks to the agency’s concerns regarding certain credit card marketing and account management practices. The OCC’s letter outlines three credit card practices that "may entail unfair or deceptive acts or practices and may expose a bank to compliance and reputation risks. While the OCC has deemed these practices "unfair and deceptive," the agency has to this point declined to prohibit them. With the increase in the pervasiveness of credit cards and the number of consumers who utilize them, the OCC in my view should recommit itself to protecting consumers.
You mean credit card companies might engage in questionable marketing practices? Say it isn't so! And the Bush administration hasn't done anything about it? I'm shocked!
Seriously -- it's about time we looked at these companies' practices. And while Dodd is obviously looking to get some press for his presidential run with these hearings, it's still a really good thing to see. This is something I'm going to try and follow for however long it goes on.
Update [2007-1-27 12:10:1 by bonddad]:: Thanks to Silver Oz below for pointing out this article. You'll notice that Senator Dodd used the average CC debt figure of $9300. According to this article:
Most of the people citing the $8,000 figure credit it to CardWeb.com, a service that tracks credit card trends.
CardWeb, however, doesn’t contend that the average American owes more than $8,000 on cards. Their statistics show that the average debt per American household with at least one credit card was $8,940 in 2002, the last year for which figures are available.
To get that number, CardWeb simply divided the total outstanding credit card debt at the end of 2002 -- $750.9 billion -- by the 84 million American households that it says have at least one credit card. (CardWeb uses a slightly different definition of household than the Fed does. And the company contends that 80% of households, rather than the Fed’s 76.2%, have at least one credit card.)
This article notes that the Credit Card debt problem is more concentrated.
* More than a third -- 36% -- of those who owe more than $10,000 on their cards have household incomes under $50,000, according to the VIP Forum analysis.
* 13% who owe that much have household incomes under $30,000.
* The percentage of disposable income used to pay debts is still near record highs.
* The median value of total outstanding debt owed by households rose 9.6% between 1998 and 2001.
* Bankruptcies set another record in 2003, with 1.6 million personal filings, the American Bankruptcy Institute reports.
No comments:
Post a Comment