Eight million Americans cut up their credit cards this year, according to new data out from credit bureau TransUnion. Some of those plastic deserters were folks who faced scary economic conditions and decided to voluntarily cut back on debt spending. But for others, it wasn't a matter of choice.
Millions of customers found themselves unceremoniously ejected from the ranks of the card-worthy thanks to last year's Credit Card Accountability, Responsibility, and Disclosure Act, or Credit CARD Act. The new rules were supposed to "protect American credit card holders" by stopping "unfair rate increases." Instead, credit card companies prepared for their new straitened circumstances by booting customers who would no longer be profitable (read: poor people and other risky borrowers), and hiking interest rates for others. American Express even offered $300 bonuses to customers willing to pay off their cards and close their accounts—a deal designed to entice the kind of cash-strapped customers AmEx was soon to find less lucrative.
But as the new rules make it less appealing for credit card companies to offer their services to certain segments of the population, most of those people don't revert to a cash-only state of nature. The appetite for credit doesn't vanish when credit cards are harder to get. Instead, customers turn to options like installment plans, layaway, and payday lending for quick credit—and the fees they pay for those options are as high or higher than the credit card costs Congress and the White House found so objectionable. And in an economy that runs on plastic, debit cards replace credit cards for everyday purchases.
Prepaid debit cards have been around for a long time, and they were gaining steam long before Congress decided to protect Americans from predatory credit card companies. For lots of customers, prepaid debit cards are a great way to enjoy the benefits of the plastic-based economy without the temptation of going into debt, even with the fees that most cards charge.
But not all prepaid plastic is created equal. Consider (konsider?) the Kardashian Kard, a prepaid debit card graced with the smiling faces—and overflowing bodices—of useless celebrity sisters Kim, Kourtney, and Khloe. In a world of reduced choices, the Kardashians and their ilk are more than happy to scoop up the creditless suckers. This new wallet accessory boasts fees so spectacularly high that Connecticut Attorney General Richard Blumenthal felt compelled to comment that "among the prepaid debit cards now on the market, the Kardashian Kard is particularly troubling because of its high fees combined with its appeal to financially unsophisticated young adult Kardashian fans." The card—sorry, the kard—which costs a minimum of $99.95 a year to own, was taken off the market on Monday. Only 250 customers signed up, so the decision to kill the card likely reflected limited customer enthusiasm, not just fear of government action.
When the Credit CARD Act was signed, the White House reported that "nearly 80 percent of American families have a credit card, and 44 percent of families carry a balance on their credit cards." People who still have cards are carrying a little less debt than they were a year ago: $4,964 on average, down from $5,612 at this time last year, but this quarter saw the first (slight) increase in carried balance in some time. Today, 78 million American customers don't have credit cards, but most of those people are still paying for various kinds for credit-card like convenience.
Of course, the same folks who brought us the Credit CARD Act are always happy to regulate the alternatives to credit cards out of existence as well, brandishing the same rhetoric about predatory fees and rates and the same kinds of rules. But while government officials—including the new Consumer Financial Protection Bureau, headed by Elizabeth Warren—get set for another round of consumer credit whack-a-mole, consumer finance companies are already at work figuring out how to work around the new rules and give people the credit and convenience they want. And in the same breath, New Jersey Sen. Robert Menendez praised the Kardashians for voluntarily killing their card and announced plans to regulate prepaid debit cards with some brand new legislation.
Katherine Mangu-Ward is a senior editor at Reason magazine.