banktime.com

The New York Times called them “yuppie food stamps.” The seven hundred million credit cards hanging out in Americans’ wallets are definitely fraught with controversy. That plastic is misunderstood, misused, and maligned is generally the only certain thing about them. (That figure, by the way, does not take into account the estimated five hundred million retail store cards in circulation right now.) That, and the fact that we as a nation are far more reliant on our plastic than we really ought to be. Since the economic collapse, it’s a troubling fact that more of our countrymen are depending on credit cards than their savings. The imminent enactment date of the CARD (Credit Card Accountability, Responsibility, and Disclosure) Act, signed into law by President Obama over Memorial Day weekend last year, is expected to transform the credit card industry and cure many of its ills. But many people have an unrealistic idea of some things going on in the industry these days. The bill won’t fix everything, that’s for sure. Coming from the Times, here’s the lowdown on the five biggest credit card myths leading to misunderstanding of the industry and the people involved in it these days.

The first? That America’s middle class has always depended on plastic to manage its budgets, and that things would go completely haywire if the middle class’s plastic was taken away. The thing to remember is that the middle class has certainly not always had access to credit cards on which they could rely. Back in the 1960s and 1950s, storekeepers in small towns segued to the big department stores like Montgomery Ward and Sears. The small shopkeepers had kept “open book” credit for their regular customers, and credit cards originally grew out of a practical need to replace that system on a larger scale for implementation. You couldn’t use this credit anywhere else, and all the cards were intended for was essentially allowing housewives and families to keep a running tab for the month that could be paid like a single bill at the end of the month. Originally, universal-use cards were reserved solely for the higher echelon members of society. Only the best customers received them, and these products served as something like a loss leader, since people made a habit of paying off their balances in full every month. (This was also the point of origin for gold, silver, and platinum cards: banks color-coded their best customers.) Credit cards were little other than a status symbol for the next twenty years, used by the rich mainly as a means of convenience rather than actual need. It’s only been in recent years that banks began marketing their products towards lower-income clientele and that customers accordingly began using these cards to fulfill their needs, rather than wants.

It wasn’t because banks became better at managing risks, either. That’s another erroneous assumption. At the point where credit card use started dramatically expanding, the only thing that had changed was deregulation in the banking industry. Thanks to a 1978 Supreme Court ruling, usury laws became a thing of the past and rate caps on consumer interest charges were erased overnight. During the 1980s, changes in federal banking law suddenly allowed for things like sky-high rates of annualized interest and penalty fees – two things that credit card companies naturally really like. Demand shifted from manufacturing companies to individual households, and banks happily jumped to meet that demand. Now, credit unions are the only banking entities in the United States with established usury caps (of fifteen percent), and a quarter of all American cardholders are fueling the continued ability of banks to be profitable for everyone with their interest and late/over-limit fees. Almost half of all credit card accounts don’t generate any profit for banks, yet that previously-mentioned one quarter manages to account for two-thirds of all fee profits.

It is also not true that irresponsible credit cardholders, like those who end up late or defaulting on their obligations, cost responsible cardholders more money. It’s true that credit card companies are losing money in record amounts, fueled by irresponsible borrowing on the part of consumers with plastic in their pockets. But in all honesty, these customers aren’t the ones who have gotten banks in the U.S. into such trouble that they require bailouts and, consequently, taxpayer money. As the Times put it: “Major banks encouraged their credit card divisions to relax their standards at the end of the financial bubble; more customers went deeper into credit card debt. Those customers were encouraged to refinance their mortgages, generating high fees for the banks. Banks then sold securities backed by credit card debt to institutional investors around the world. When the bubble burst in September 2008, banks could not sell these low-quality securities. They were stuck with poorly performing credit card portfolios.” THAT is the extent of the trouble that has been caused by credit cards in today’s day and age.