Credit Card Pain is a Sign of Economic Trouble Ahead

There are a number of contradictory signs in the economy. The stock market, considered a leading indicator of a recovery, has surged more than 20 percent in the last month, which is positive. Credit card companies, however, are suffering huge losses and that may spell economic trouble ahead.

Credit cards are an important indicator because they represent consumer spending, which accounts for more than 60 percent of the U.S. gross national product. When credit card loans decline, the economy usually declines as well. Also, while most consumers could not tell you where the S&P 500 average closed recently, they know precisely how much extra pain their credit cards have inflicted this month. So they are an important indicator of consumer confidence.

There has been a rash of glum news from credit card issuers. Capital One said its net charge-off rate -- the amount of loans considered uncollectible -- rose to 9.33 percent in March, up 1.27 percent in a single month. J.P. Morgan's charge-off rate was 7.72 per cent, up from 5.56 percent in the final quarter of 2008.

Bank of America, the nation's largest lender by assets, reported a whopping $1.8 billion loss on its credit cards in the first quarter of 2009. "Make no doubt about it, credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve," BofA CEO Ken Lewis said.

So what happens when big banks lose money in one facet of their business? They raise charges! Consumer blogs such as this one have been inundated with complaints from consumers that the interest rates on their cards have been jacked up without warning. Bank of America, for example, raised the average annual rate from less than 10 percent to a range of 14 to 16 percent for an estimated four million customers.

Capital One explained it this way: "Due to extraordinary changes in the economic environment, we're reviewing our existing credit card accounts. Having considered these economic conditions, your account current purchase rate and length of time you've had this rate and account, we will be increasing your purchase rate." The consumer who received this letter was raised from a 5.9 percent fixed rate to a 15.9 per year variable rate.

The Pew Charitable Trusts released a study of credit card practices in 2007 and 2008 that concluded that banks raised interest rates on nearly a quarter of credit card accounts using practices "which the Federal Reserve has deemed unfair and deceptive."

Outraged consumers have flooded not only consumer websites but the offices of their elected representatives in Washington with complaints.about credit card practices. Congress has been quick to respond. A House bill sponsored by Rep. Carolyn Maloney would impose a number of limitations on credit card issuers, such as preventing the marketing of cards to people under 21 and blocking issuers from increasing interest rates on existing balances. A Senate bill is also in the works.

The Federal Reserve, which regulates big banks in the U.S., has adopted some new rules of its own, such as stopping companies from imposing higher rates when consumers are late in paying unrelated outstanding bills and preventing companies from averaging finance charges over two previous cycles. But the rule changes don't take effect until July 2010.

The heat in Washington over credit card charges has grown so intense that President Obama met with credit card executives earlier today to urge greater clarity in the ways cards are administered. "What we want to do is ensure that people can have access to the credit they need, but that we can also do this in a way that's transparent and fair and honest," said White House spokesman Robert Gibbs. If Obama's intervention isn't enough, count on Congress to step in and impose more stringent conditions on card issuers.