U.S. Strengthens Credit Card Restrictions

Why is the U.S. Strengthening Restrictions on the Credit Card Industry?

U.S. President Barack Obama signed a landmark credit card bill on May 22nd, setting stricter regulations on the credit card business of financial institutions. According to some analysts, this move is aimed at resolving the hidden troubles faced by the credit card industry.

The U.S. credit card industry is currently facing more hidden risks; previously these have brought many problems to the financial industry and the U.S. economy. Apparently, Obama and his economic team hope to eliminate the hidden issues, and avoid repeating the burst of the real estate bubble, by strengthening regulations on the credit card industry.

America is a consumption-driven economy. In the good times, financial institutions lowered application standards and income thresholds for their potential customers, which drove U.S. debt-financed consumption, and as a result created the credit card bubble. According to official statistics, at present, nearly 80% of Americans are credit cardholders and 70% of families use credit cards. By the end of last year, the number of credit cards in the U.S. market already surpassed 700 million. Credit card debt for Americans reached more than 945 billion U.S. dollars in March 2009, 25% higher than a decade ago.

The unexpected financial crisis trapped the U.S economy into recession and brought an ever climbing unemployment rate. This further led to increased bad debts of large financial institutions, including some credit card giants like American Express, Citibank and Bank of America. The data released by the U.S. Department of Labor on May 8th shows that the unemployment rate reached 8.9% in April, the highest level since the end of 1983. The U.S. Federal Reserve Board recently forecast that the U.S. unemployment rate will reach 9.2% to 9.6% this year.

Some Wall Street analysts predict that under these circumstances, the credit card charge-off rate could climb to 9%-10%, which means loan losses could be as high as 70 to 75 billion U.S. dollars. Some credit card companies will have to face the danger of fund shortage or even bankruptcy, dealing another heavy blow to the U.S. financial industry that bears large amounts of toxic assets; this may even further stall the American economy.

In light of past abuses in issuing credit cards, the law clearly stipulates that before issuing credit cards to applicants who are under 21 years old, credit card companies must get their testimony, or that of their parents, proving they can repay the money; or affirming that their parents are ready to pay off their debt if they default. In the meantime, the law has set regulations on consumer protections accordingly. For instance, the law prohibits card companies from raising interest rates on existing balances arbitrarily, unless the borrower pays at least 60 days late. If the cardholder pays on time in the following 6 months, the company will have to restore the original rate.

During the signing ceremony, Obama said that it’s the economic slowdown that endangers the financial situation of U.S. families and traps many cardholders deep into debt. Nevertheless, the greedy commercial behaviors of credit card companies made it even harder for them to get rid of the debts. “Just as we demand credit card users to act responsibly, we demand that credit card companies act responsibly, too,” he warned.

The credit card landmark bill will go into effect next February. There are murmurs of discontent from the card issuers, who think that the law will limit their ability to make profits and will force them to lower credit lines. To cope with bad debts, the issuers have resorted to measures such as raising the application standards, cutting the proportion of high risk customers, etc. Some even had large scale closings of the accounts of rare users. It’s reported that U.S. credit card issuers have written off 2000 accounts just in March of this year. According to the survey by U.S Federal Reserve Departments, in March of this year, the revolving credit from credit card consumption, calculated by a yearly rate, has fallen 6.8%.

The credit card industry plays an important role in the U.S. economy. To ensure its healthy development is of great significance to the stability of the U.S. financial industry and consumer protections. By signing the landmark bill, Obama has undoubtedly taken a major step in this direction.