According to the Wall Street Journal, Americans owe approximately $826.5 million in revolving credit debt, which is mostly made up of credit card debt. But the outstanding student loans–both public and private–total approximately $829.785 billion. According to experts quoted in the story, there is $605.6 billion in outstanding federal student loans and $167.8 billion in outstanding private student loans. It’s estimated that $300 billion in federal student loan debts have been incurred in the last four years.
The story attributes this shift to Americans paying down their credit card debts, which usually carry higher interest rates than student loans, as well as the rising costs of higher-education.
Student-Loan Debt Surpasses Credit Cards | The Wall Street Journal | August 9, 2010
The long awaited Credit CARD Act goes into effect today. As summarized by the Consumer Law & Policy Blog, the Act has these main benefits:
- The interest rate on one credit card account can’t be raise because you were late or missed a payment on another card account.
- Most promotional rates have to last at least 6 months.
- Your billing statement has to tell you about the penalties and other consequences for late payments.
- There are much stronger restrictions about how credit cards can be marketed to people under 21.
- Generally, credit card companies can’t charge fees for going over the card’s credit limit.
New Credit Card Law Effective Tomorrow (Monday, February 22) | CL&P Blog | February 21, 2010
A recent post at Credit Slips, a blog about credit and bankruptcy, analyzes a new First Premier Bank credit card that carries a whopping 79.9% interest rate. While this sounds astounding, the post notes that the 79.9% APR card may actually be cheaper than previous First Premier credit cards when you consider fees and interest as a single cost. The post explains that effective APR for the old First Premier card, which had a “stated” APR of 9.9%, is 112.3% because the numerous fees the card carried resulted in a total cost of $280.75 to gain access to a $250 line of credit for a year. The effective APR on the new First Premier card is 104.9%, as it will cost $314.70 to gain access to a $300 line of credit for a year.
The post cautions against concluding that the CARD Act is increasing the cost of credit, as many in the card industry threatened. The First Premier cards are a good example of this. The old card carried a stated interest rate of 9.9% when the actual cost was much higher. But because of the new requirements of CARD Act, the new First Premier card more accurately informs consumers of the actual costs of the card by revealing the 79.9% interest rate.
New Credit Card Tricks, Traps, and 79.9% APRs | Credit Slips | December 18, 2009
In a recent op-ed piece in BusinessWeek, Harvard professor Elizabeth Warren makes a strong case for the President’s proposed Consumer Financial Protection Agency. She argues that
[t]his information gap between lender and borrower exists throughout the consumer credit market. The average credit-card contract is dizzying—and 30 pages long, up from a page and a half in the early 1980s. Lenders advertise a single interest rate on the front of their direct-mail envelopes, burying costly details deep in the document. Faced with legalese and obfuscation, consumers can’t really compare offers or make clear-eyed choices about borrowing at all.
She goes on to point out that
[i]n short, the consumer credit market is broken. Real competition, the kind that permits informed choices and allows the best products to rise to the top, has disappeared. And as we know all too well, a broken credit market doesn’t hurt just consumers. Reckless lending and borrowing has jeopardized the soundness of some of our biggest banks and caused a severe economic downturn. The agency proposed by the President would promote clear disclosure of the risks and costs for everything from mortgages and credit cards to payday loans and bank overdraft fees. It would also regulate financial products by type—home loans, say—regardless of what kind of lender issued them. The change would stitch up the hole in the current system that permits credit-card issuers to pick their regulators and lets nonbank mortgage companies grant loans with no effective oversight.
Professor Warren also issued the following YouTube video making her case:
As Professor Warren points out in the video, the banking and finance industry is already setting aside huge sums of money and interviewing public relations firms to fight the proposed agency. Predictably, the industry has taken a chicken-little approach and argued that the new agency threatens our financial system. But as Ed Mierzwinski points out in his recent post on the U.S. PIRG Consumer Blog, “[w]ait, [the financial industry] already destroyed that. Actually, it threatens their campaign-cash driven hegemony over our financial system that helped lead to the collapse.”
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