The Gathering Credit Card Storm

Our current financial crisis is a case study in ripple effects. A lot of bad mortgage loans, bad loans between organizations, bad evaluations by ratings agencies and bad oversight by government collectively toppled big Wall Street firms. This caused our credit markets to freeze, leading to business contraction, massive job losses, and deep economic pain on Main Street.

First came the crisis over bad paper, now the crisis could get worse because of bad plastic.

Consumer credit card defaults are a gathering storm. At the same time it's becoming harder to get new credit, Americans have almost $1 trillion of credit card debt outstanding. Defaults are rising. Delinquencies are at a six-year high.

And the credit card debt itself is only part of the problem. While consumers are struggling, credit card issuers haven't let up on some of their most questionable practices, including exorbitant penalties and rate hikes. To make matters worse, just recently several credit card issuers have announced plans to raise interest rates, even for people who've paid their bills on time.

We can't afford to watch consumers' finances dragged down by unfair credit card practices. It wouldn't be fair in any situation, but at a time of such national financial turmoil, it's an even bigger threat to our economy. Inappropriately high credit limits, high penalties, and high interest rates have nudged so many people toward bankruptcy in the first place.

I've introduced a bill, the Credit Card Reform Act, to give consumers even greater protection from deceptive lending practices. The bill will end the industry practice known as "universal default," so a company can't raise your interest rate if you have a perfect record with that credit card, but miss a payment with some other creditor. It will force fees to be reasonably tied to costs incurred by the company, protect young consumers from card solicitations they didn't ask for, and make sure that when a company offers you a set of terms, they can't change those terms once you've applied for a card.

Congress isn't the only body that can act. Following measures that I proposed in the legislation, the Federal Reserve has taken some steps to address this issue. Earlier this year it took action on retroactive rate increases and the amount of time customers have to make payments. It was the right move, but it was only a start. The Fed's rules apply to subprime lending, but don't address excessive fees on the vast majority of cards on the market. Now we're seeing the consequences of limited action.

Earlier this week Secretary Paulson announced that the Treasury Department is considering giving tens of billions of dollars to the Federal Reserve to purchase securities based on credit card debt. I'm not necessarily against some kind of direct action, but if the government is going to get involved, it should insist upon a high degree of fairness and protection for the consumer. The Fed should issue guidelines for any credit card company that wishes to participate, prohibiting arbitrary rate increases, unilateral changes to credit card agreements and universal default.

Now is the time to act, because, like the debt on our cards, if we keep putting this problem off month after month, it's only going to get worse.