Credit Card Reform Won't Pay Down Consumer Debt

(MoneyWatch)  Starting today, the nation's banks must comply with the Credit Card Act of 2009. Although most of the legislation's key provisions will not take effect until February 2010, credit card companies must immediately begin to mail bills at least 21 days before their due dates and provide at least 45 days' notice before making a significant change to their rates or fees.

Credit card reform was needed, but it's not likely to help Americans kick their credit card habit just yet.

The credit card phenomenon has always felt eerily similar to a drinking problem. In moderation, it works for most of us. But once there's a habit of overindulgence, things go south quickly. And with credit cards, the drinker doesn't even have to pay up front for his martini.


Once hooked, many can't get off the stuff easily. So it's not surprising that the young are targeted -for years, credit card offers have flooded college campuses and teenagers with promises of easy credit. Starting in 2010, there will be far tighter restrictions on how companies can serve these under age drinkers. Congress will also require clearer disclosure about the terms of all credit card transactions, so the rules of the game can't change mid-stream.

All well and good, but will the new rules make a real dent in the scourge of credit card debt? I'm not so sure. Over the past thirty years, many Americans have formed a dangerous habit.

In 1980, US household debt amounted to approximately 50% of our Gross Domestic Product. Today, that number has climbed to 100% of GDP. According to Annaly Capital Management, a return to even the pre-bubble levels of 65% of GDP would require consumers to pay down $4.6 trillion of debt. For the 44% of families that carry a balance on their credit cards, that will not be an easy task.

The more suspect credit card company practices did not help anyone but the companies' shareholders; neither did they actually cause people to amass staggering sums of debt. That prize belongs to individuals who lived beyond their means and Congress can't legislate financial responsibility.

But the deep and painful recession has begun to snap people out of their credit-addicted stupors. While Congress' credit card reform will not do much to reduce consumer debt-that's the job of the borrower-perhaps more disclosure and limits on how credit card terms can change, will give debtors a better chance of kicking the habit.

Image by Flickr User Adrain Hoffman, CC 2.0