Credit Card Myths Explored on Eve of New Law
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Credit Card Myths Explored

Credit cards are an ingrained part of American culture today, as this country’s population is more dependent on credit cards than they are on savings. Americans on the whole have around 700 million credit cards, and 500 million retail store credit cards. This fact has created a culture of credit in these times of recession, in contrast to that of the Great Depression when individuals relied more heavily on savings.

A number of myths have formed alongside our current credit card culture, as well. The Washington Post examines several of these preconceptions in a recent article, and questions their validity.

The Credit Card Accountability, Responsibility and Disclosure (CARD) Act, which is due to go into effect soon, will surely have an impact on these myths, and on the way Americans use credit cards. For now, though, here are some of the misconceptions that have made improvement hard, and which the Post article brings to light.

Credit Card Myths

The middle class have depended on bank credit cards for a long time

In fact, the credit card industry didn't really began until the 1950s when large retail stores started offering credit to consumers. To drive up sales and drive out competition, large department stores like Sears issued customers credit cards. However, these cards could only be used at the stores that issued them.

Bank cards that could be used anywhere, like Visa MasterCards, targeted upper class Americans. These cards were status symbols, a sign of wealth, and they were used for convenience rather than necessity. This mark of credit culture didn’t change until the 1980s.

Responsible credit card holders have to make up for those who don’t pay off their credit card debt

This misconception, according to the Washington Post, asserts that defaults and bankruptcy rates are leading to rising fees and interest rates. This is not necessarily true. Banks have taken major hits from mortgage foreclosures and home loan defaults. According to the article, that, along with a questionable business model, has led to these higher fees. A cycle of relaxed lending and borrowing led to more consumers going into debt, and to banks getting stuck with poorly performing, low-quality securities, and therefore difficult financial straits.

In other words, the other services that the bank provides, like loans, brokerage fees and insurance, have not been able to compensate for the inefficiencies in the banks’ credit card business models. Also, rates and fees may be adjusted to increase margins. So while a credit card business may still be profitable, if a company wants to make even more money, they may raise fees and rates on everyone.

Credit card company competition decreases the need for regulation

According to the article, 60 percent of outstanding credit card debt is controlled by three companies: Bank of America, Citibank and Chase, making it one of the most concentrated markets in the country. This has led to a decline in consumer choice in the last twenty years, and the credit card companies are increasingly under scrutiny concerning monopoly allegations.

While it will provide long-needed consumer protections, the upcoming CARD Act, in the opinion of the article author Robert D. Manning, has some surprising omissions. Retroactive interest rate increases and unrestricted marketing to under-21 consumers will be prohibited. But at the same time, the bill will be phased in over nine months, which won’t help those who are in debt right now.

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