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Credit cards may go charging into the past

New regulations signed into law by Obama could bring back the tight access and low limits of the '50s.

May 26, 2009|Abigail Goldman

Norman Hockett didn't realize that the small plastic rectangle that arrived in his Fresno mailbox in the fall of 1958 put him at the vanguard of the credit revolution.

Fresno was the proving ground for the BankAmericard, the granddaddy of mass market credit cards, and Hockett was one of the first 65,000 people to get one. He used the new tool carefully, never failing to pay off his balance when he bought a TV or a dinner out.

"I have never paid any interest," said the 78-year-old retired teacher and salesman. "I clear the account every month, and I don't run up a big bill."

If the industry -- and its customers -- maintained the prudence of Hockett's Depression-era upbringing, the new credit card law signed Friday by President Obama might never have been necessary.

Instead, most people probably have more in common with Barbara and Albert Sanchez, who got their cards decades later, on the other side of Fresno from Hockett and a world away from mid-century attitudes about debt.

The Sanchezes entered a far less regulated credit card system in which Americans faced constant entreaties to take advantage of easy credit. They say the tantalizing opportunities almost led to their financial ruin.

The middle-aged Fresno couple racked up $20,000 on their cards, which helped them maintain their lifestyle after Albert's overtime at the lumber yard dwindled and Barbara's housekeeping clients scaled back. They finally sought help from a credit counselor.

"I figured I could deal with it myself, but then I couldn't do it," said Barbara Sanchez, 52. "I don't want to lose my house."

In 1958, the Sanchezes might not have qualified for the BankAmericard -- and certainly wouldn't have been able to rack up tens of thousands in debt. Back then, average customers had a credit limit of $300; "preferred" BofA clients were entitled to carry $500.

Although the new measures set to go into effect early next year won't roll back Americans' attitudes toward plastic payment, the latest credit card reform bill seeks to address what consumer advocates have called the most egregious practices. But even those, some credit card watchers say, aren't enough.

Among other provisions, the new rules will require credit card companies to give more notice before changing clients' terms such as interest rates, and the issuers won't be allowed to apply those rates retroactively to existing balances unless the cardholder's minimum payment is 60 days overdue.

Issuers won't be allowed to charge interest on bills consumers pay on time, extract extra fees for paying by phone or bank transfer, or issue cards to people under 21 without proof of income or a parent's signature. And issuers must apply any payment over the minimum to the balance with the highest interest rate.

Banks also won't be allowed to accept charges that put consumers over their limits.

The American Bankers' Assn. says that the new regulations fundamentally will change what credit cards are and who will be able to use them.

"It means that there will be less credit available," said Edward L. Yingling, the trade group's president. "That means some people will not be able to get a credit card who got it in the past, and those who get the credit card, in some instances, will have a smaller line of credit."

"We're turning back the clock to the credit card of the 1960s," he added. "Everybody paid $25 a year and was charged 18% and it was a very straightforward card, but a lot of people couldn't qualify, the lines of credit were smaller and those who handled credit well subsidized those with credit issues."

Consumer groups, however, say the rules will temper some of the practices that trapped people such as Charles Clark, a 26-year-old medical student from a poor neighborhood on the South Side of Chicago.

Clark didn't have any experience with credit cards when he got his first piece of plastic, lured by a promotion that gave him an expensive anatomy book for free.

He figured that he was building up his credit as he juggled his finances by charging gas, lab equipment and books while attending Nashville's Meharry Medical College. Bank of America, which issued his MasterCard, raised his limit about every three months -- proof, he thought, that his strategy was working.

"I thought that as long as I made my payment and never was late, I'd be OK," Clark said.

But although he was always on time with at least a minimum payment and made sure to stay under his credit limit, Clark soon found himself crossways with the credit card issuer.

"In the old industrial economy, the best client was one who could pay off debts," said Robert D. Manning, director of a consumer financial center at the Rochester Institute of Technology. "In the post-industrial economy, the best customer is the person who can't pay it off."

Clark was a gem. His credit limit was $8,000, and his debt nearly as high.

Then one day, he found that Bank of America had jacked up his interest rate to 15.99% from 7.99%.

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