Credit Card Reform: Will it Help Enough?

As we all know there is ongoing economic turmoil. Part of what makes it worse is the way credit card companies operate. If you get laid off, and fall behind on your credit card payments, there is a snowball effect that can make anyone take pause.

Let's use an imaginary family to illustrate: Bob and Bonnie are a young family with two kids in grade school. Bob works in a warehouse and takes home $1500 a month. Bonnie works part-time at a gas station, 20 hours a week. She brings home $500 a month. The take home pay together is $2000 per month.

Bob and Bonnie have expenses, of course. The rent is $700 per month; the utilities are a combined total of $300 per month. Insurance on their car is $150 per month, the car payment is $200 per month, and gasoline for the car is $100 per month. Groceries run about $300 per month, and they have a credit card balance of $4800, which has a minimum payment of $100 per month. The credit card balance is from a number of minor emergencies, and two car repairs. They really did not rack up the bill from frivolous spending. In summary, they have a monthly expense of $1850 per month. Baring any unexpected expenses, they are making it, if only slightly.

The economic collapse of 2008-2009 hits. One day Bob goes into work and finds a pink sheet of paper on his desk. The warehouse Bob works at is laying 25% of the workers off, including him, indefinitely. Bob comes home, disheveled, and unhappy. Bob applies for unemployment, and is somewhat relieved to learn he can draw half his old income for the next half a year. Bonnie comes home from the gas station and learns of Bob's misfortune. She is able to pick up more hours at the gas station, but only 10 more per week. The new monthly income for Bob is $750, and the new monthly income for Bonnie is also $750, for a combines total of $1500.

Now Bob and Bonnie have to do something about the expenses. They try to live a more frugal lifestyle, and are able to get the utilities down to $250 per month. The gasoline goes down to $75 per month as the daily commute to the warehouse is eliminated. They are even able to trim the grocery bill by utilizing coupons, planning their shopping more carefully and utilizing food banks. This cuts their grocery bill down to $175 per month. Bob has his insurance cut down to state minimums, knocking it down to $90 per month. They cannot do anything about the rent or car payment or the credit card. Selling the car is not an option, since they still need transportation and it has still a year of payments, and it is only worth just what they owe on it. Their new monthly expenses are now $1590. That means somebody will have to be paid late or not at all.

Bob sends in the $100 minimum credit card payment. It arrived one day after the due date. When the next bill arrives, Bob gets hit. First, the 12.99% interest rate is now 19.99% and there was a $35.00 late fee. Even worse, the minimum payment of $100 is now a minimum payment of $250. How did this happen? Well, it seems the credit card company now has a policy of making you pay 5% of the outstanding balance instead of the 2%.

Another month goes by, Bob sends in another payment, a partial one. Bob gets hit again. The interest rate shoots up to 29.99% because he is in default for not paying the full payment. He is also hit with late fees, and a fee for going over his credit limit.

Just a couple months later the credit card company is demanding the entire balance, which is now over $5500. As if Bob who cannot afford the $250 payment could ever hope to have $5500 all at once.

Bob interviews for a new job, paying his old wage of $1500 per month take home. Bob is excited, as is Bonnie. They think they finally are going to pull through the muck and mire. Bob however is disappointed. It seems that since he now has bad credit, the new job offer is withdrawn, and Bob remains on unemployment for another month before finally getting a job that pays just $1100 per month take home. The increase takes some of the pressure off, and Bob and Bonnie can pay the rest of their bills without nearly the struggle they had before.

Well, it's not over yet. The credit card company has taken Bob an Bonnie to court and a judgement has been decided against Bob and Bonnie. Both of them are having their wages garnished, and the only option left is bankruptcy. It seems their credit scores will be in the toilet for years to come either way.

The Bob and Bonnie you just read about can represent millions of Americans today. Some credit card reforms could help this situation. Credit card companies have a long list of unfair and abusive practices that can snowball into all sorts of bad outcomes. To name a few:

Universal Default: No matter how timely you are at paying on your credit card, if you are late with another creditor or utility, they raise your interest rate.

Random interest rate increases: Their rights in the payment agreement give the latitude to raise your interest rate for any reason, or no reason at all.

Payment allocation: If some of your balance is at 7% and the rest is at 13%, all you payments will be applied to the 7% portion until it is paid off. Only then will you payments go towards the 13%.

Changing of payback terms: If you signed up for a card with a 2% of balance minimum payment, that should be honored. If the company raises it to a higher level, you should be able to opt-out, and maintain the original terms.

Some reforms are already in the works. By 2010, legislation will put an end to some of the practices, such as raising interest rates on existing balances. More legislation is in the works, including the Credit Cardholders' bill of rights. A summary can be found at: http://maloney.house.gov/documents/financial/creditcards/20090115_cc_Onepager.pdf