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Are Consumers Kicking the Credit Card Habit?

By Martin H. Bosworth
ConsumerAffairs.com

June 11, 2007

New reports show that Americans are not only borrowing less on their credit cards, but even paying down their debt to a small degree. The news comes as Congress considers reform of the most egregious practices of the credit industry.

The latest Federal Reserve report finds consumer borrowing rose by just 1.3 percent in April 2007, down from 7 percent in March -- led by a 0.5 percent drop in variable or "revolving" debt, which includes credit cards.

Of the total U.S. debt of $2.6 trillion, revolving credit card debt fell $403 million in April after rising $6.7 billion a month earlier, according to the Fed. The decrease means that more consumers were paying off their debt than were incurring new charges, the first decline in 13 months.

Analysts claimed the cutback in spending was due to lack of available funds from mid- and low-income groups -- thanks in no small part to high gas prices -- and increasing reluctance by lenders to extend credit to risky or "subprime" borrowers.

The pullback on credit card spending was part of an overall drop in consumer confidence, as high gas prices and the ailing housing market contributed to low ratings in the RBC Consumer Confidence index. Even with rising wages and strong employment, many Americans feel anxious and want to spend less, according to the report.

"Households are feeling the strain...There seems to be a lot of concern about debt and managing those monthly obligations," said Bankrate.com's Greg McBride.

Congress Lashes Credit Practices

The news of Americans' decreasing credit card debt came on the same day that the House of Representatives' Financial Services committee called the banking industry on the carpet for another round of tongue-lashing over its credit practices.

Committee Chair Carolyn Maloney (D-NY) said the Subcommittee had received "a flood of correspondence from individuals with credit card complaints...[including] arbitrary and unfairly high interest rates and penalty fees; confusing practices that constantly change in the issuer's favor; and impossible barriers to getting help to sort through a problem, even when the issuer has caused it."

"I am concerned that we will see a 'perfect storm' in consumer credit as these pressures converge on Americans, and that the ripple effect will be felt throughout our whole economy," Maloney said.

The committee heard from representatives of the financial industry, consumer advocates, and government officials, including Federal Reserve governor Fredric Mishkin. Mishkin discussed the Federal Reserve's recently proposed changes to credit card disclosures and notices, designed for easier reading and understanding by cardholders.

"The [Fed] is keenly aware of concerns over the fairness and transparency of card marketing and account terms," Mishkin said.

Ed Mierzwinski, head of the U.S. Public Interest Research Group, countered that while the Fed's proposals were good, they didn't go far enough to address the root problem of abusive credit card practices.

"It is not a substitute for substantive consumer protections, including prohibitions on the practices that even the industry’s name brand, supposedly blue chip players, engage in," he testified. "The solution, in our view, is to ban the most unfair practices, reinstate the authority of state regulators to enforce their consumer protection laws, and to prohibit unilateral changes of terms clauses and mandatory arbitration clauses."

Both the House and the Senate have proposed new legislation that would rein in billing practices such as "trailing interest" and double-cycle billing, and mandate that credit card agreements be written in clear, understandable English on a level the majority of Americans can understand.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, agreed that greater regulatory power might be required to protect consumers from the ever-shifting landscape of the credit card business.

"[C]urrent industry practices and continual innovation in this business line present significant challenges in maintaining a balance between profitability and the principles of consumer protection and fairness," she said in prepared remarks.

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