Changes Brewing for Credit Cards

Americans have a love-hate relationship with credit cards. On the one hand, it is hard to argue with the amazing convenience of this little piece of plastic. In fact today there are almost a billion active credit cards in the United States -- more than 2 cards for every man, woman and child in the country.

The problem is that at times credit cards are too convenient. Recently I spoke with a professor of consumer behavior who had done numerous studies on credit card use. Although intuitively we all know it to be true, he explained the psychological reasons why credit cards inspire buying behavior:

1. There is a disconnect between use of a credit card and, the money needed to pay for the charge especially when the charge is below $25 and does not even require a signature.

As one expert said, "plastic cards have an anesthetizing effect."

2. There is a delay in the reduction of our wealth when we use credit cards. When we pay cash or write a check we know immediately how much we spent. But, with a credit card because we have time to "pay the piper," we don't think of ourselves as any poorer when we use the card.

To support his point he cited a study done with college students. Students who had made purchases were interviewed walking out of a college bookstore. Those who had paid with cash or check were asked how much they had spent. Ditto for those who had paid with credit cards. The testers were then authorized to check the student's response against the actual purchase.

Those who had paid with cash or check knew within a couple of percentage points the exact amount of their purchase. But those who paid with credit cards were not even close.

Total U.S. credit card debt today is about one trillion dollars. U.S. households using credit cards have an average of $9,000 in credit card debt.

Popular opinion is that credit card issuers are taking advantage of card holders, tripping them up with fees and rate increases whenever possible. In 2008 the Federal Reserve asked for feedback on credit card issuers and received an unprecedented 60,000 responses (almost all negative). In December of 2008 the Fed issued new regulations to take effect in July, 2010. These regulations have to do with late fees, rate increases and allocation of payments. In addition, I believe we will soon see a bill presented to Congress (which passed the House in the last session but not the Senate) titled "The Credit Cardholders Bill of Rights." This bill will most likely become law and will put restrictions on what credit card issuers can do relative to rate increases and fees.