Credit Card Reforms enacted by Congress
M. Ryder

When gas prices shot up during the recession, Barbara Riggle, a part-time hotel waitress from Merriam Woods, Mo., was ready. Or so she thought. Armed with her plastic panacea, Riggle was able to swipe away the pain at the pump without even realizing quite how far beyond her means she was spending.

But then the bills started piling up. "It was just too convenient," says Riggle, who last year joined the crowd of Americans who have been driven into bankruptcy by credit card debt. "It is a convenience to have that little piece of plastic and to pay for our gas that way, to pay for a hotel room or a dinner or what have you, and before long we realize that we've spent too much."

Since their introduction, credit cards have had a seductive hold over the psyches of American consumers. As symbols of status and accomplishment, lines of credit have had an empowering effect, leading cardholders to take overly optimistic views of their purchasing power. But as a result of the recession, these fragile illusions of wealth have come crashing down. Now, in the aftermath of sweeping legislative reform, Americans' complicated relationship with credit has reached a historic crossroads.

New attitudes. In many ways, this month was supposed to mark a victory for consumer rights. While part of Congress's Credit CARD Act of 2009 kicked in last year, the legislation's most critical provisions, which include restrictions on rate increases and over-the-limit fees, will take effect on Monday. But in a turn of events that has been troubling for cardholders, credit card issuers used the time window between the bill's passage last year and its start date on Monday to preemptively raise rates, add fees, and cut back on rewards.

Coupled with the crippling effects of the recession, these maneuverings have proved hard to digest. As a result, consumers have been feeling increasingly vulnerable -- and it's starting to show. Notably, several recent studies have indicated that Americans plan to reduce their credit card usage. Meanwhile, outstanding credit card debt, as measured by the Federal Reserve, has been on an unprecedented downward trend.

While this shift away from credit is largely practical, somewhere along the way consumers also underwent an emotional realignment. And they appear to be not only tightening their belts but also hardening their attitudes toward the cards that fueled and ultimately helped to unhinge the last economic boom.

Cardholders are "a little bit outraged," Linda Sherry, the national priorities director for the nonprofit advocacy group Consumer Action, says of the response to the flurry of rate increases and other policy changes that have taken place over the past several months. "I think many people think of it as 'I've been loyal to this credit card, and it's not being loyal to me.'"

Bill Hardekopf, the chief executive of LowCards.com, a company that analyzes and reviews credit cards, speaks of this disillusionment in terms of a shifting partnership dynamic. "That partnership between the credit card issuer and you as the consumer has changed dramatically. The pendulum has kind of swung in favor of the issuer," he says.

Mixed in with the anger is an element of fear surrounding the pieces of plastic that have had such a transformative impact on the American economy. And as individuals claw their way back to firm footing, they are increasingly likely to steer clear of the behaviors that drove them into debt.

It's this feeling of trepidation that will prevent consumers like Jim Courtright, an advertising specialist from Chicago, from returning to credit cards. Until he declared bankruptcy last year, Courtright was, in many ways, the ideal credit card user. But after taking the strong line of credit he had built up over a lifetime of on-time payments and staking it to a business venture, he eventually got in over his head. "I literally had to finance myself off of credit cards," says Courtright. "[You don't] realize how much more expensive it gets, how seductive it is, to get pulled into that morass...It sneaks up on you, and you don't realize how quickly you can get in deep."

Now, as he pieces his personal finances back together, Courtright has sworn off credit cards, and he's hardly alone. "I think hopefully consumers have learned a very valuable -- albeit painful -- lesson in how not to use credit cards," says Hardekopf.

Changes in store? Even in the face of this potent mix of fear and anger, however, some expect consumers to develop more faith in their cards over the next several months as they discover their new rights. Notably, as of Monday, card companies will be unable to retroactively increase rates on fixed-rate cards except under very limited circumstances (for example, if a cardholder is over 60 days late on a payment).

Additionally, companies will have to get permission from cardholders before instituting over-the-limit fees. Cardholders who don't agree to the fees will simply be barred from spending more than they have been allotted. This is an important departure from the old status quo, in which consumers often unwittingly purchased beyond their limits and found out about it only when their card companies hit them with hefty fines.

With these provisions finally in effect, Americans' relationship with their cards could be at a turning point. It's possible that they will soon soften their opinions a bit, but in many ways, the psychological and financial damage has already been done. "I think when everybody looks back on it, the provisions from the Credit CARD Act will probably end up hurting more people than they helped," says Hardekopf. "The provisions were very good, but the reaction that has taken place by issuers to make up for that lost revenue has ended up hurting a wide base of credit card consumers."

So where does this combination of reluctance and disillusionment leave the economy? On one hand, the backlash against credit cards has coincided with a surge in the use of debit cards. Visa, for example, announced last year that the last three months of 2008 represented the first time ever that the majority of its purchase volume came from debit cards. "Whether that's a permanent shift, it's hard to tell," says Ben Woolsey, a spokesperson for the online marketplace CreditCards.com.

On a broader scale, Americans' reduced appetite for credit is expected to eventually counteract the rash of optimism that anchored the economy during the earliest stages of the recovery. The way many investors see it, that means that the market is headed for a sustained period of slow growth.

"We had a society that was using credit egregiously, and that's come to a screeching halt," says Kim Scott, the manager of the Ivy Mid Cap Growth mutual fund. "And so the forced or voluntary reduction in the use of credit by consumers is a reason why we'll have a slower-growth economy."

 

 

 

Personal Finance - New Era Begins for Credit Cards

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