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Put It on My O-CardThe case for government-backed credit cards.

By Christopher BeamPosted Friday, April 24, 2009, at 11:22 AM ET

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Creating a government-sponsored lending agency—a Fannie Mae for credit cards—would rein the whole system in. For one thing, it would offer lower rates than the usual 18 percent. The government could charge, say, 8 percent interest and still turn a profit. It would include none of the usual hidden fees or surprise charges. (In 2007, penalty fees were $7.5 billion, cash advance fees were $5.6 billion, annual fees were $4.6 billion, and interchange fees were $23.6 billion.) And while the credit card industry spent $34 billion on marketing in 2007, the government would avoid that expense entirely. The card would theoretically be accepted everywhere, because merchants would know Obama is good for it.

The caveat: You'd have to be supercreditworthy to get a card. The government doesn't want to have borrowers behind on payments; if they defaulted, taxpayers would have to pick up the tab. (Fannie Mae and Freddie Mac had higher standards than other lenders, too.) But that would be preferable to the current system, which punishes people for even minor slip-ups, like paying at the wrong time of day or buying stuff at the wrong store.

The government system could even serve as a refinancing option for troubled card-owners. If you currently pay 18 percent interest on a $10,000 balance, you could refinance a chunk of that under the government credit program. That would serve as a sort of bailout for credit card companies—they'd have fewer customers default, and at the same time customers would pay lower rates.

So how would the government get into the credit card business? It has two main options. It could start from scratch outside the existing system. That would mean creating a bank or other lending entity, reaching out to individual merchants, and building a network of borrowers from the ground up. Or it could simply become an issuer. That means it would offer cards through an existing company like Visa or Mastercard. In that scenario, you could use the card everywhere right away. The government could still establish its own interest rates and terms of use, but it might have less flexibility than it would as an independent lender.

One way to attract borrowers would be to link the credit cards to a cause—like an affinity program, but for government. Every time you buy something, a small percentage would go to wind-farm construction, say, or clean-coal research, or school computers. The government could also do something creative like dipping into the Social Security money pool. If it lent that money to creditworthy Americans, it could make a killing.

There is a risk that a public credit card would undercut the competition. It would by definition have a triple-A rating, since the government could guarantee its own loans, while other lenders would be in the low single-As at best. The state therefore couldn't be too cavalier about wooing customers from other companies. It would also have to avoid freeloaders who don't intend to pay back their government-backed loans.

But a little competition would be a good thing, since it would force companies to re-examine their lending practices. And instead of straight regulation, this would be—you listening, Newt?—a market-based solution.