Congress Tackles Credit Card Debt

This week, Congress will vote on a Credit Card Holders' Bill of Rights — and last week, President Obama met with the heads of card companies, signaling his support for the bill. Host Jacki Lyden checks in with some of these credit card holders — including one woman who froze her cards in a block of ice — and talks with U.S. Rep. Carolyn Maloney, who co-wrote the bill that the House will consider this week.

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JACKI LYDEN, host:

Welcome back to ALL THINGS CONSIDERED from NPR News. I'm Jacki Lyden.

Credit card debt has moved to the top of the financial agenda in Washington. This week, the House will vote on a bill that's dubbed the Credit Cardholders' Bill of Rights.

Just a few days after, President Obama met with executives of the country's biggest credit card companies.

President BARACK OBAMA: We want to preserve the credit card market, but we also want to do so in a way that eliminates some of the abuses and some of the problems that a lot of people are familiar with.

LYDEN: Credit card debt: if you don't have it, you probably know someone who does, which is how we ended up at Rachel Wilson's(ph) apartment.

Rachel's a friend of one of our producers, and she got her first credit card during her sophomore year at Oberlin College in Ohio to cover her textbooks.

Ms. RACHEL WILSON: I figured I could just get the credit card, and I had campus job. And then I would buy my books and then pay off the, like, $300 or 400 that it would cost. No big deal.

(Soundbite of laughter)

Ms. WILSON: That didn't happen.

LYDEN: Not only didn't she pay off her books, she was $4,000 in debt by the time she graduated. She decided to move to Boston, got a job with a salary of $28,000 a year. But she continued to put a little bit on her cards - drinks, dinner, sometimes more.

Ms. WILSON: We couldn't afford the couch, but we were, like, credit cards.

LYDEN: You couldn't afford the couch pillows.

(Soundbite of laughter)

LYDEN: Three years later, ca-ching, she was 17,000 bucks in the hole.

Ms. WILSON: I couldn't sleep at night and I just had this kind of constant anxiety about it. And I would say, okay, that's it. Like, I am not going to, you know, spend anymore of my credit cards. One time, I froze my credit cards in a block of ice so I couldn't use them.

(Soundbite of laughter)

LYDEN: Unfortunately, they thawed and worked just fine. So, Rachel had to try something more drastic.

She took a job in Washington, D.C., doubling her salary and ratcheting down her social life. Plus, she started recording every single expense on her blog, desperately seeking censibility - that's cense with a C. Here's a bit from last Monday.

Ms. WILSON: April 20, 2009, 27.50, two "Twilight" books. Embarrassing, but they are addictive. 12.50, monthly pledge to WAMU.

LYDEN: Public radio listener. Well, glad you have your priorities straight.

(Soundbite of laughter)

LYDEN: After two years, Rachel's almost to the point of paying them off, just $3,000 away. And, no, that doesn't include her student loans, which brings us to Carmen Berkley.

Ms. CARMEN BERKLEY (President, United States Student Association): Every semester, I'd ask my mom, ask my sister, ask my grandma for money for books, and I felt bad because going to college was already a huge burden on my family. And so, that was, you know, the major reason why I decided to even take out the credit card.

LYDEN: Carmen is a 23-year-old president of the United States Student Association, a lobbying group. In her senior year at the University of Pittsburgh, she had unexpected surgery. She leaned heavily on credit cards. So, by the time she graduated, when you add up the student loans, the medical bills, the cards, she's in debt to the tune of $100,000.

Ms. BERKLEY: I'm going to be probably paying this off for the rest of my life. At our last conference in March that we had here in D.C., we actually had students fill out little cards that talked about how much debt you're actually in. And when I went through the cards, it wasn't just one or two people of a stack of about 300. There were at least 160 students who said I am in over $5,000 in credit card debt. So, I see this as a crisis.

LYDEN: And the student loan giant, Sallie Mae, agrees. A new study shows that more than half of all college students have at least four credit cards, and the average student graduates with just over $3,000 on those credit cards. Leaving college in 2009? Not a lot of fun in this job market. The less work that's out there, the higher the default rates of all credit card holders.

Mr. CHRISTIAN WELLER (Senior Fellow, Center for American Progress): Right now, at the end of 2008, credit card companies had to write off about 6.3 percent of their total portfolio.

LYDEN: 6.3 percent is just about an all-time high, but it could go much higher.

Mr. WELLER: More worrisome is that many people now expect the credit card default rates are going to go to eight or 9 percent over the course of 2009, and that is territory we've never seen.

LYDEN: Christian Weller is a fellow at the Center for American Progress.

You know about mortgage-backed securities. We've heard a lot about them. Credit card securities work the same way. The loans are packaged into bonds that are bought and traded by investors. So, when borrowers default, that can weaken the bonds.

It's no surprise that as job losses climb and home equity falls, many more people will default on credit cards. But will rising credit card defaults take out entire banks the way that mortgage defaults did?

Mr. WELLER: We're not going to see a massive credit card bubble bursting here. There was just not enough time between 2006 and 2008 to really build up enormous amounts of credit card debt that could go bad at this point.

LYDEN: That's good news for the economy. Credit card issuers have been dealing with troubled borrowers for decades. They know the behavior of their customers, so there shouldn't be a big surprise pop when the loans go sour.

Still, Congress is trying to chuck some of the practices of banks and card companies.

Here's New York Democrat Carolyn Maloney.

Representative CAROLYN MALONEY (Democrat, New York): I guess the most outrageous abuse to me is the very fine language in the contract that says the companies can raise your interest rates any time, any reason, even if you are a perfect customer, always pay on time and never go over the limit.

LYDEN: Mm-hmm.

Rep. MALONEY: Can you tell me, Jacki, is there any other contract in the world that can change its terms at any time?

LYDEN: Maloney co-wrote the Credit Cardholders' Bill of Rights. The House votes on that legislation this week. Among other reforms, the bill promises to simplify credit terms and random retroactive interest rate hikes and curb marketing to kids. A Senate bill is even more stringent. It bars card companies from jacking up interest rates for most borrowers and makes it tougher for those under 21 to even get cards. The industry doesn't like it.

Here's Robert Hammer of R.K. Hammer Investment Bank.

Mr. ROBERT HAMMER (President and Chief Executive Officer, R.K. Hammer Investment Bank): This is a huge target on the forehead of banks right now, as you know. The industry on its knees right now right at the time they need to be lending more. And they're not going to do that while they're being crippled by the economy and the administration and the regulators. So, you look at what their response is, their response is to curtail credit.

LYDEN: That's happening already. Credit limits are being slashed. American Express actually paid some of its borrowers off to close their accounts.

Representative Maloney is undeterred(ph).

Rep. MALONEY: The credit card companies opposed this bill in good times and in bad. And the Federal Reserve came forward with a permanent rule to put this in place by July 2010. And they called these practices - and I quote from the Federal Reserve - "unfair, deceptive and anti-competitive," end quote.

LYDEN: People need credit (unintelligible). But do they need so many cards?

Remember Rachel Wilson who's digging her way out of debt in D.C.?

I've never actually seen someone shuffle a deck of cut-up credit cards as if it were the old pack of 52.

(Soundbite of laughter)

LYDEN: That's rather amazing. Fill me in.

(Soundbite of laughter)

(Soundbite of song, "The Fame")

Ms. LADY GAGA (Singer): (Singing) I can't help myself. I'm addicted to a life of material. It's some kind of joke. I'm obsessively opposed to the typical.

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