But they do have the misfortune of carrying a balance on their credit cards, putting them among the more than 50% of families who don't or can't pay off their credit card balances each month.
The average balance per open credit card -- including both retail and bank cards -- was $1,157 at the end of 2008. That's up from $1,033 at the end of 2006, a growth of nearly 11 percent in two years. (Source: Experian marketing insight snapshot, March 2009).
Even though credit card borrowing fell in February 2009, the number of credit card holders defaulting on their debt has continued to rise in the very same month. According to Reuters, “U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co (AXP.N) and Citigroup (C.N).” Incidentally American Express is the company that recently gained notoreity by paying low-charging customers to close their accounts, and Citigroup has been one of the most aggressive in raising rates.
Recently Congress has considered legislation to stop some of the credit card companies' practices that hurt consumers most:
Suddenly raising interest on accumulated balances
Raising rates across all credit cards held by a borrower because of a late payment made on one card
Charging for payments made over the internet or phone
The bad news for consumers is that these changes will not take place until 2010, and in the meantime, credit card companies are doing everything possible to wring out what they can in fees and interest rate increases while they still can.
To be fair, credit card companies are facing their own limitations on how much they can lend in a financial system where banks are leery even of lending to one another. Since the recession has dragged on, and unemployment has escalated, credit card companies have little way of knowing which of today's “good” customers may be tomorrow's defaulting customers because of escalating job losses. As a result, “Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, estimates that Americans' credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010 -- and fewer Americans will be offered new cards.”
Some of those who pay off their balances every month and enjoy good credit may feel scant sympathy for those who are facing higher rates because they still carry credit card balances. But it's hardly a secure position when even good borrowers are losing their home equity lines and finding other sources of credit drying up.
If credit card companies continue to squeeze those who are paying them on a regular basis, particularly by lowering their credit limits and injuring their creditworthiness, they risk worsening the already weak consumer spending that generates a substantial portion of the United States' gross domestic product (GDP).
What looks like fiscal prudence now could also backfire on credit card companies when the economy begins to rebound, as many consumers may choose to get rid of their cards rather than pay the higher fees and interest rates.
For example, “Tamara Smith of Burlington, Vt., got a notice from Bank of America that her 7.9% rate will increase to nearly 13%. She immediately called the bank and opted out of the change. That means she keeps the 7.9% rate on her roughly $2,000 balance, but can't use the card for new purchases without having the higher rate apply to her entire balance,” (“BofA to Boost Rates on Cards with Balances,” The Wall Street Journal, April 9, 2009).
Credit card companies may find a short-term profit boost in these actions, but as more consumers move from credit to debit cards or even to cash, they may find little reason to return to the companies that tried to ditch or gouge them. And credit card companies may find it much harder to woo back the American consumer in good times when they have treated the consumer so badly when times were bad.
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