In 1949, a finance executive named Frank McNamara invited two friends to dinner at Major's Cabin Grill in New York City. At the end of the meal, McNamara found that he had forgotten his wallet, and he was forced to call his wife for money. McNamara vowed never to face that humiliation again. He made good on the vow: A year later, he returned to Major's and this time paid the bill with a new product--a small piece of cardboard.

Thus was born Diners Club, the world's first credit card. Within a year, 20,000 such cards were in circulation throughout the country; today, there are 1.5 billion--five for every American man, woman, and child. What in McNamara's day was a convenience that allowed the rich to dine out without cash is now a staple of middle-class life.

Credit cards have proliferated for many reasons. Some are economic: At a time when average earnings are stagnant, when sudden income drops bemuse of layoffs or health problems are common, and when public and private insurance systems have frayed, families increasingly turn to credit cards to serve as their financial safety net. The growing reliance on plastic is also about culture: Americans love freedom. Just as the invention of the mass-produced automobile gave us the freedom to travel wherever or whenever we wished, credit cards allow us to spend money in ways and at times that work for us.

These freedoms, however, make both cars and credit cards dangerous if they are used improperly. The difference is that in the past 40 years, we've taken steps to make automobiles safer. As cars became an integral part of middle-class life, traffic fatalities rose sharply. In the 1960s, thanks largely to the efforts of consumer advocates, Congress passed landmark safety legislation that led to mandatory seatbelts and rear-window brakes lights. The new rules reduced accident rates and made those crashes that did occur less deadly (the auto fatality rate has dropped 57 percent since 1966).

While cars continue to become safer, credit cards are becoming more dangerous. Of course, cards don't kill, but they threaten families in other ways. Credit-card debt totaled $685 billion last year, and the problem is getting worse: In the last decade, credit-card debt rose by about 70 percent. Although economists debate whether rising costs or rising consumption have contributed more to that trend, there is no question that most Americans experience the debt as a burden. Seventy percent of American families said last year that they are canting so much debt that it is making their family lives unhappy; three times more young people are worried about going deeply into debt than about a terrorist attack.

Credit cards are especially dangerous because of the business practices of credit-card companies. Buried in those offers you receive daily in the mail from banks like MBNA and Chase are fine-print contract terms not subject to negotiation. Cardholders who miss a single payment may be hit with two separate charges: a $39 fee and a penalty interest rate of 2499 percent or higher. Those who mistakenly go over their credit limit no longer have their cards declined. Their purchase is charged, along with a $35 fee and--you guessed it--the 24.99 percent penalty rate. These fees can quickly double or triple the underlying debt on the card. Perhaps most egregiously, even families who pay their bills on time can be hit with penalty rates. Under a practice known as "universal default," companies can raise rates based on a change in a customer's credit score, a dispute he has with another creditor, or even a purchase he makes that they don't like. These new rates apply even to old credit, so if you bought a washer and dryer and new clothes for the kids, all at 7.99 percent interest, you can get socked with a 24.99 percent rate--even if you have made every payment on time.

Practices such as these are great for the industry's bottom line. From 1996 to 2003, the money credit-cant companies make from fees has more than quadrupled, to $7.7 billion. Families aren't making out quite as well. Penalty fees and interest combined now cost average credit-card holding households more than $800 each year. All told, Americans cough up about $90 billion annually in interest and penalty payments on credit cards. That's $90 billion that could have gone into car repairs or college tuition or savings accounts--and ends up in company bottom lines instead.

For families with adequate incomes, that $39 fee may be just an annoyance. For families on the edge, a cascade of penalties and fees can mean economic ruin. Both in the United States and abroad, there is a clear correlation between rising credit-card use and increasing rates of bankrupt. At a time when more Americans have no choice but to depend on consumer credit, more families find their cards offer no safety net at all--they are instead, in the words of Harvard law professor Elizabeth Warren, a cement life raft.

Stable families shouldn't be slammed by fees they had no reason to expect. And struggling families shouldn't be getting pushed into bankruptcy by companies purporting to offer them a solution to their problems. This doesn't mean we should take credit cards away from borrowers, any more than the consumer safety movement meant taking cars away from drivers. But it does mean that we need to make credit cards safer to use, with measures that honor Americans' freedom but empower them to protect their own financial interests.

 

Urban Institute: Economy/Taxes
Urban Institute reports on: Economy/Taxes - The Urban Institute is a nonprofit nonpartisan policy research and educational organization established to examine the social, economic, and governance problems facing the nation.

• Navigating State and Local Finances
  This article summarizes a March 2007 TPC-Northwestern conference examining state and local finances. Reprinted from Lincoln Institute of Land Policy Land Lines October 2007 issue.
• The iPod: Lightning Rod for Criminals?
  New crime statistics from the FBI show violent crime increased in 2005 and 2006, and an Urban Institute analysis offers evidence that the concurrent explosion in iPod use may have triggered the spike.
• Is There an iCrime Wave?
  The recent increase in violent crime defies easy explanation, and many hypotheses have been put forward for debate. In this brief, we propose that the rise in violent offending and the explosion in the sales of iPods and other portable media devices is more than coincidental. We propose that, over the past two years, America may have experienced an iCrime wave.
• Booms and Busts: The Case of Subprime Mortgages
  Edward Gramlich, the Richard B. Fisher Senior Fellow at the Urban Institute and a member of the Board of Governors of the Federal Reserve System from 1997 to 2005, died September 5. In his last paper, delivered at a Federal Reserve Bank of Kansas City symposium shortly before his death, he called for swift action to fix the problems in the subprime mortgage market. The paper was presented by former Federal Reserve colleague David Wilcox, who offered "Four Images of Ned Gramlich" before reading Gramlich's "Booms and Busts: The Case of Subprime Mortgages."
• Federal Investment in Children Projected to Weaken by 2017
  Federal investment in children is likely to decline markedly within the next decade, according to a new Urban Institute study. The share of the federal budget for programs that enhance kids' future productivity or income is forecast to drop from 1.6 percent of the gross domestic product in 2006 to 1.3 percent by 2017, under current policies.
• Data Appendix to Investing in Children
  "Investing in Children" tracks trends in federal investment from 1965 to 2017 for children as compared against the nation as a whole. This appendix details our data sources, the programs we include, and the methodology used to estimate the percentage of all expenditures that went to children.
• Losing Ground? : Federal Investments in Children Will Shrink Over the Next Decade if Present Policies Continue
  This brief charts U.S. federal spending on investment in total and for children from 1965 to 2017. Relative to GDP or domestic spending, total investment and investment in childrenunder almost any definitionfell over the 19652006 period, though with some recent rebounds. More important, projections of current policies show that overall government investment and especially investment in children are threatened to decline in relative and sometimes absolute importance, squeezed out mainly by faster, automatically growing programs that tend to favor consumption. These data raise the question of what relative priority the government should place on investment, and particularly investment in children.
• Investing in Children
  We chart U.S. federal spending on investment in total and for children from 1965 to 2017. Five major categories can be consideredsome more so than othersto be investment or to have investment components: education and research, work supports, social supports, physical capital, and defense investment. Relative to GDP or domestic spending, we found that total investment and investment in childrenunder almost any definitionfell over the 19652006 period, though with some recent rebounds. More important, projections of current policies show that overall government investment and especially investment in children are threatened to decline in relative and sometimes absolute importance, squeezed out mainly by faster, automatically growing programs that tend to favor consumption. These data raise the question of what relative priority the government should place on investment, and particularly investment in children.
• Tax Fairness, the 2001-2006 Tax Cuts, and the AMT : Testimony before the U.S. House Committee on Ways and Means
  In this testimony Burman discusses the issues of tax fairness, the 2001 to 2006 tax cuts, and the individual alternative minimum tax. Burman argues that while the federal tax system mitigates economic inequality, the recent tax cuts have disproportionately benefited those at the top, while also increasing the number of people potentially subject to the AMT. He concludes with a brief discussion of how to fix the AMT in a fiscally responsible manner.
• Tax Reform, Tax Arbitrage, and the Taxation of "Carried Interest" : Testimony before the U.S. House of Representatives Committee on Ways and Means
  C. Eugene Steuerle gave testimony on the taxation of carried interest before the U.S. House Committee on Ways and Means. He notes among his findings that as a matter of both efficiency and equity, capital gains relief is best targeted where tax rates are high, as in the case of the double taxation of corporate income. The case for providing capital gains relief for carried interest is relatively weak, resting primarily upon whether the administrative benefits of the simple partnership structure needs to be maintained in this arena; it does not rest upon arguments for favoring capital income, entrepreneurs, or risk.
• Urban Institute Mourns the Passing of Senior Fellow Edward Gramlich
  Edward M. Gramlich, the Richard B. Fisher Senior Fellow at the Urban Institute and a member of the Board of Governors of the Federal Reserve System from 1997 to 2005, died this morning at approximately 6:25 a.m. He passed away from leukemia at the Washington Home and Community Hospices. He was 68 years old.
• Concentrated Poverty : Dynamics of Change
  This brief compares metropolitan census tracts that improved with respect to poverty in the 1990s (poverty rate decreased by 5 percentage points or more) with those that worsened (poverty rate increased by 5 points or more); looking at the racial composition of both types and how the shares in both types varied in different locations within metropolitan areas and in different types of metropolitan areas nationally. It finds that while trends by these measures were considerably more favorable than in the 1980s, the 1990s still saw a mix of improving and worsening neighborhoods almost everywhere, warranting local action to address the challenges that both imply.
• Promoting Homeownership among Low-Income Households
  The United States current system of low-income housing assistance is biased against homeownership. This paper documents the bias and suggests reforms to eliminate it. The new policies would allow more low-income families to become homeowners by providing similar subsidies for renters and owners under the two largest programs for low-income housing, Section 8 and the Low-Income Housing Tax Credit. The reforms would not require additional spending, would improve the cost-effectiveness of the system of low-income housing assistance, and would avoid the two biggest mistakes in past attempts to subsidize homeownership: subsidizing the construction of new units and requiring intended beneficiaries to buy from selected sellers.
• Stabilizing Future Fiscal Policy : It's Time to Pull the Trigger
  Fiscal policy is out of control. Programs, such as Social Security and Medicare, have design features that push up spending faster than the growth of revenues. It is time to change the course of the automatic pilot driving these programs. To do so, policymakers can develop triggers that automatically curb spending. Triggers will level the playing field between programs that have large automatic growth and those where growth or even maintenance of effort cannot be obtained without new legislation. The paper examines triggers employed to reform Social Security in other advanced democracies and explores design options for an optimal trigger.
• Paying a Price for Decisions of Yesteryear
  In this Baltimore Sun commentary, senior fellow Eugene Steuerle argues that the democratic process is imperiled by retirement, health, and taxation promises that will be very difficult to keep.
• Fewer Businesses Are Organized As Taxable Corporations
  Corporations that are taxed under subchapter C of the Internal Revenue Code pay a separate entity-level tax on their income (the corporate income tax) and