Credit Cards and the Credit Crisis
Barron, Jacob, Business Credit
The term "credit crunch" has been used generically to refer to the global banking crisis and, more specifically, to the scarcity of available credit in today's business world. It implies a lack of financing and it's true that loans and credit are hard to come by at the moment, but if you looked at the way consumers and small businesses have been using their credit cards to make payments, you might not know it.
As credit has all but evaporated, consumers, small businesses and their owners have turned to their trusty credit cards to help them out of bad situations, whether that's an unfortunate medical emergency or a shortage of critical goods and services. Portable, plastic and perhaps too powerful, credit cards have become the safety net of the American consumer, and as B2B acceptance of credit cards has grown in recent years, with vendors looking to take advantage of the quick, paperless nature of credit card transactions, the business world is beginning to face a similar situation. As previously mentioned, however, banks, many of which issue these credit cards and are at least initially responsible for the purchases made with them, are facing both a shortage of credit worldwide and increased credit card use with slower, and sometimes absent, payment from users. The result has led banks to seek an alternate and, some would say, abusive routes to profitability, which have raised an eyebrow or two on Capitol Hill.
Users vs. Issuers
Late in April, executives from the nation's leading credit card companies met at the White House with President Barack Obama to discuss the current state of credit card businesses, banks and what to expect in the future. "In the meeting, participants discussed the important role credit cards play for consumers, small business and the broader economy. The group discussed trends in credit card usage and lending that serve as leading indicators of the current and future health of the economy," said Edward Yingling, president and CEO at the American Bankers Association. "The group also discussed factors that are negatively impacting the availability of credit for consumers and businesses alike--including the depth of the recession, rising unemployment and the freezing up of the securitization markets."
Obama also made his intentions clear that more limitations on issuers were on the horizon. "The president did raise concerns about certain issues surrounding credit cards," added Yingling. "The card executives listened carefully to those concerns and agreed to work with the administration to address them. The executives also discussed the comprehensive new credit card regulations recently adopted by federal regulators." The regulations to which Yingling referred actually clarified rules issued in December 2008 that prohibited what were deemed unfair credit card practices. They specifically forbid institutions from raising interest rates on outstanding card balances just because the account was closed and require institutions offering deferred interest and other programs to keep these offers in line with the original rules, meaning that the fact a user signs up for a deferred interest card doesn't give the credit card company the right to enact "hair trigger" or "universal default" interest rate increases.
In addition to these rule changes, both houses of Congress and the White House recently lit up with renewed vigilance against abusive credit card practices. Two prominent Senators, Chuck Schumer (D-NY) and Chris Dodd (D-CT), asked the Fed to freeze interest rates until more stringent measures could be implemented. Moving quickly, other Congressional leaders also proposed two separate bills in the House and the Senate, to which Obama lent his support, that would liberate credit card users from the wrath of credit card issuers by limiting their options. Swiftly passing through the House by a wide bi-partisan margin was the Credit Cardholders' Bill of Rights Act of 2009 (H. …