Creditnet News Story
Was the US Recession Caused by Credit Card Companies?
Monday, May 18, 2009
By Thomas Astery
Government is putting the blame on credit card companies for the state of the economy, but are they really to blame? Read more at Creditnet.com.
No one can deny that the US economy is in a dismal state at best. Unemployment is increasing steadily, and naturally, a soar to record highs for foreclosures and repos have followed. Unfortunately, a decrease in or loss of income does not mean an immediate decrease in expenses, causing consumers to rely heavily on credit and credit cards for financial support.
Banks felt a direct impact to their operations with this sudden increase in credit debt and mortgage defaults. In response, banks implemented tougher credit card terms and higher interest rates, which led to a huge public outcry against the practices of some credit cards companies. Consumers felt they were being taken advantaged of at a time when they desperately needed credit. In many cases, card companies arbitrarily hiked their interest rates or applied universal defaults. Sometimes rates were changed without proper prior notice. As a result late fees piled on top of the already growing debt of many credit card holders. Even those who paid their bills on time each month were affected by these predatory acts as interest rates increased even for those with good credit.
The government’s response was the introduction of a credit card reform bill. The bill received bi-partisan support and passed with a large majority vote in the Senate. None dared to oppose it, not even the senators in states where credit card companies play dominant role in their states’ economy. President Obama also lobbied for this bill, saying that he is seeking "accountability" for the crooked lending practices used by the credit card industry.
But are credit card companies really to blame? Industry representatives say they have become a convenient scapegoat for the bad economy. They claim the mounting bad debts were brought about by the massive job cuts. Because bad debt translates to big losses, credit card companies were forced to increase their interest rates. After all, how can they continue to lend money if they are making no profit?
The government, however, remains unmoved. The bill has now reached Congress and if passed, will take effect in 9 months.
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