Credit Crunch

Last month American Express gave me some horrifying news: The minimum monthly payment had been jacked up from roughly $500, which I'd been making in interest-only payments ever since Amex raised the annual percentage rate on my credit line to a brutal 29.24 percent, to more than $1,200. If I could barely make the minimum payments before, how in the world would I be able to make them now?

Such is the dilemma that many struggling working families are now facing. In response to an advisory issued by the Office of the Comptroller of the Currency, which regulates national banks, banks and credit card companies are significantly increasing the minimum payments they require from their credit card customers each month. Until recently, credit card companies would typically string customers along, allowing a payment schedule that could have no end. Now, when customers make minimum payments, the credit card companies are obligated to charge an amount that includes not only the cost of outstanding fees and finance charges but at least 1 percent of the amount owed. Although responses have varied, credit card issuers have typically doubled their payment minimums from 2 percent to 4 percent.

For those who have been using credit cards to pay for day-to-day living expenses--I racked up an $11,000 debt during a time when I had temporarily lost my income--this increase in the minimum payment is a mixed bag at best. The OCC's policy forces the one out of seven customers who routinely make minimum-only payments to actively reduce their debt and actually pay less over the life of their debt. At the same time, this "tough love," as some have called it, throws many cash-strapped consumers, especially those tied to punitively high interest rates, into a short-term crisis. Those families that have been just barely getting by may be forced to default on their credit card debt. Right after Bank of America began to raise the minimum payment, charge-offs on bad loans increased by 63 percent.

It seems that these days working families just can't seem to catch a break. Short-term interest rates are currently at 4.25 percent. The benchmark rate has been raised thirteen times in a row since the Fed began raising rates in June 2004. Meanwhile, inflation has gone up 3.4 percent since December 2004, and real wages have dropped 0.4 percent over the same period. Recent dips in inflation have helped earnings recover a bit of lost ground, but working families are still not quite as well off as they were just a year ago, much less in November 2001, when the nation began to pull out of recession. Meanwhile, the Bureau of Economic Analysis reported that the nation's savings rate was negative in the third quarter of 2005, the first negative savings rate since quarterly updates were made available in 1947.

Ironically, this is partly what has the OCC so spooked in the first place--the day of reckoning for creditors and the cash-strapped consumers on whom they've been aggressively feeding. With families skating on the edge of default and bankruptcy, the effect on consumer spending and the overall health of the economy is potentially calamitous. "This advisory was not intended to help consumers," Robert Manning, author of Credit Card Nation, recently said on National Public Radio. "It was intended to force banks to essentially clean up their under-performing portfolios.... The average consumer is being penalized by the concern of regulators about the true value of many banks' credit card portfolios."

The OCC's advisory has not exactly been embraced by banks and credit card companies, especially because it suggests that creditors may have to actually reduce their interest rates and fees to give cardholders a fighting chance of reducing their balances. Also, there have been attempts by consumer groups, advocates of low-income communities and politicians like Vermont Independent Congressman Bernie Sanders to blunt the harsh effects of the minimum payment hikes on cardholders.

But notwithstanding the new bankruptcy laws, which were virtually penned by the credit card industry, and considering all the other economic pressures on low-income communities and working families, comprehensive credit card reform, which is actually created with the consumer in mind, is long overdue. The vulnerable and embattled position in which millions of consumers find themselves is a Bush Administration betrayal of the same "ownership society" that reinforced the vaunted role of debt and the consumer in the nation's economy. Rather than serving as passports to economic citizenship, credit cards are among a growing range of financial services that surround consumers like landmines, carefully calibrated to dramatically increase fees and interest rates for those least able to afford them.

Nationwide, household debt has soared to more than $10 trillion and makes up the highest percentage of household income ever measured. It's not surprising that credit card companies made a record $30 billion in profits in 2004, largely off of the backs of debt-ridden families. The imbalance of power between consumers and credit providers couldn't be more obvious.

Luckily, I was able to pay off my entire $11,000 American Express debt in one fell swoop, thanks to proceeds from the sale of my late mother's house. I guess the moral of the story is that my mother had to die in order for me to escape credit card default and possible financial ruin. For too many American families, not even this bargain with the devil is available.

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