Abusive Credit Card Practices Further Weaken the Economy
Many of the depressing reports on the health of the American economy reference that 60% of our economy is driven by consumer spending. After years of stagnant middle- and lower-income wages, ballooning consumer debt, dramatic home-equity borrowing, the sub-prime mortgage crisis, skyrocketing gas prices and the collapse of home values, one wonders just what consumer has money left to spend?
With $1.2 trillion in equity and housing value destroyed in the first quarter of 2008, consumer spending—for luxuries and, increasingly, necessities—is being carried by revolving credit usage, which increased four-fold in recent months over the growth rate of 2004-2006. At the same time, banks reeling from stunning losses in the sub-prime mortgage collapse are squeezing many of these same sub-prime borrowers through ever more restrictive credit card policies. While generating significant short-term returns for the credit card company, these practices push borrowers ever closer to financial collapse—further weakening the economy as a whole.
Unhelpful credit card practices include:
•Processes for summarily reducing credit limits without notification–damaging credit scores, increasing borrowing costs, and moving the “financial cliff” closer to the cardholder.
•Dramatically increasing credit card interest rates, regardless of payment history.
•Adjusting payment deadlines and client communications to maximize potential payment defaults (and therefore reduced credit scores, and increased interest rates).
•Soliciting troubled, high-risk borrowers, unwary college students and others lacking sufficient credit histories with “teaser” or misleading credit card rate promotions.
•Policies that “draining” sub-prime clients through high interest rates and fees and then sell off these “noncollectable” debts to aggressive collections agencies for pennies on the dollar.
•The absence of a reasonable, reliable “path out” for troubled cardholders who wish to make good on obligations but seek a return to fiscal health.
The impact of the sub-prime mortgage melt-down has demonstrated that there is significant risk in treating non-prime borrowers and consumers as “disposable”—to be milked and tossed aside. MMA is engaging leading credit card issuers, exploring solutions that can lead to increased health for credit card companies, their borrowers and the American economy as a whole.
