Put It on My O-Card
The case for government-backed credit cards.
On the list of villains of the economic crisis, credit card companies are rising faster than their own rates. So after President Obama met Thursday with CEOs from Visa, Mastercard, and American Express, he stated his disapproval loud and clear. "The days of any-time, any-reason rate hikes and late-fee traps have to end," he said. Meanwhile, the House passed a "Credit Cardholders' Bill of Rights" that would limit unfair lending practices. The Senate version is even harsher—it would prohibit interest rate hikes for no reason and would put restrictions on marketing cards to people under 21. There may even be a provision for hanging CEOs by their thumbs.
But instead of cracking down on companies that treat their customers poorly, why doesn't the government just offer a credit card of its own? After all, government regulation may help, but it's unlikely to solve the problems of the credit industry—namely, spiraling interest rates coupled with rising defaults. Obama likes to talk about constructive alternatives. Why not offer an O-card? With his face on it?
The idea isn't crazy. In Germany and France and Iceland and India, state-owned banks issue credit cards. One difference between those lenders and private banks is that interest rates are lower, since profit isn't the state's chief goal. (Europeans also have a different relationship with credit cards, using them to make routine payments rather than rack up debt.) Government-issued credit cards could also help consumers avoid those small but numerous charges that add up over time, from ATM fees to annual fees to interchange fees.
Nor does the notion freak out economists. "It's not something I'd be sitting here and saying" in normal circumstances, says Tahira K. Hira, a professor of finance at Iowa State University. "But some of the rates are so astronomically high, it's becoming impossible to manage for individuals." Phillip Uhlmann of Tufts University says, "I think a government system might offer a cleaner type of business, more easily understood by consumers."
Wait, what are we saying? Surely we don't want the government lending directly to individuals. That way lies socialism.
Maybe so, but we're already there. Think of all the different things the state finances. It backs home mortgages through quasi-government-owned Fannie Mae and Freddie Mac. It offers student loans through its direct-loan program, providing billions of dollars to help kids pay for college. Uncle Sam will even chip in to help you buy a car—it gave auto financer GMAC a $5 billion bailout last December.
If we're already backing loans for the three biggest life expenses—homes, college, and cars—what's missing? Consumer and business credit. Consumer spending accounts for almost 70 percent of GDP. The average American household carries $8,700 in credit card debt. And just as the financial crisis swallowed the housing market, it seems to be eyeing the credit card industry. Purchases are way down. Credit card companies are slashing credit limits. Others are offering special deals: If you're the wrong kind of customer, American Express will give you $300 to close your account.
Christopher Beam is a writer living in Beijing.
Photograph of a credit card by Digital Vision/Getty Creative Images.