A credit card where it's due

New Fed rules for the industry can boost fairness – and cut into America's debt culture.

from the December 18, 2008 edition

Past generations generally knew better than to fall deep in debt. Virtue lay in thrift. These days, Americans are in red ink up to their raised eyebrows – from mortgages to their government's debt. The first reaction is to blame others. A contract's fine print was too fine. Politicians lied about the cost of new programs. Now the latest debt villain, the credit-card industry, is getting its due.

New rules coming out Thursday are aimed at ensuring credit-card contracts are on the up and up. Federal Reserve chief Ben Bernanke says the rules "will establish a new baseline for fairness."

One industry practice expected to be banned is the raising of interest rates on existing balances without clear notice of the reason, such as the end of a teaser rate. Also, cardholders who default on other bills, such as with a utility, won't have their rates raised. Monthly statements will be easier to read.

The Fed was forced to tighten its usury regulations under a threat by Congress that it might act. Lawmakers were hearing complaints about abuse as Americans took on more cards – 697 million cards in 2007 for a nation of 300 million people. The industry was making big money with more complex rules that allowed them to raise rates, often for any reason. And it was also giving cards to almost anyone – more than half of college students carry four or more cards. Such looseness of credit has left Americans carrying nearly $1 trillion in card debt.

The new rules may be all to the better for those who are seduced by impulse buying or greed, who have trouble reading credit-card contracts, or won't take responsibility after signing them. But the banking industry has a warning. If it is not allowed to "re-price" a customer's rate when that person seems at higher risk, then it will take on fewer customers. An estimated 70 million people may end up not qualifying for a card.

Americans should take this warning in stride. Sure, having a credit cushion helps many people through hard times. Those who handle debt well are usually given a fair shake by a lender. As Mr. Bernanke said, under the new rules, "consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs."

This long recession, triggered by a crisis in mortgages that never should have been lent, may end up turning America's debt culture back into a thrift culture. For the first time since 1952, household debt is on the decline. Personal saving is up after being at zero for a long time. And this Christmas, conspicuous consumption of expensive goods seems so un-Christmasy.

Now's a good time for parents to teach children about thrift by giving them savings accounts. Government should launch a thrift campaign for adults, too, and encourage the use of credit unions. States should drop their lotteries, which rely mainly on the poor who lose a disproportionate share of their income to gambling – instead of saving it.

That rectangle of plastic called a credit card isn't a brass ring to be grabbed for a fortune. It's a tool to borrow from the future, a future that both borrower and lender agree comes with an obligation to both earn – and save – money.