Credit Card Promises
During the debates over bankruptcy reform, the credit industry launched a public relations campaign claiming that bankruptcy cost every American family $400 every year. The stat was picked up and repeated as fact by both the politicians and the press (more details here). The promise was clear: pass bankruptcy reform and watch the costs of consumer credit fall. Now the numbers are coming in. Did credit industry losses decline? Did the cost of a credit card go down? A new paper, The Effect of Bankruptcy Reform on Credit Card Prices and Industry Profits, assembles pre- and post-BAPCPA data to answer that question.
First, the answers from the author, Mike Simkovic:
Yes. No. Yes, credit industry losses decreased after BAPCPA. The issuers reduced their bad debt write-offs. No, the cost of credit card debt did not drop. In fact, post-BAPCPA, the cost of borrowing on a credit card went up. Where did the money go that was saved from cutting back on bad debt losses? That money ended up in higher profits for the credit card companies.
The author's conclusion says it all: "Although bankruptcy and credit card losses decreased, the cost to consumers of credit card debt actually increased. In other words the 2005 bankruptcy reforms profited credit card companies at consumers' expense."
The paper is cited Sunday morning's New York Times front page article on consumer debt, Given a Shovel, Digger Deeper into Debt. The Times article gives another lens into the new world of consumer debt looks like.
What happens next? Does anyone hold the companies to account? Do the politicians who said that bankruptcy reform would save money say they were wrong? The advocates of the new law spoke frequently about irresponsible consumers who cost bill-paying customers money. Will the credit card companies now take responsibility for gobbling up the money earned from squeezing families harder?
Earlier this month presidential candidate Barack Obama said that he was right to oppose the 2005 bankruptcy amendments, and he laid out some key changes. As the data come in, there is more to back up Obama's position and more to support legislative change. Perhaps the next Congress will revisit the question of families versus corporate lenders and ask again who has been irresponsible.