US President Barack Obama signed a landmark credit card bill on Friday, a move seen as a major step toward stabilizing the credit card industry.

High risk

Credit card debt for Americans reached more than US$945 billion in March 2009, about 25 percent higher than a decade ago.

As the Untied States is enduring its worst recession since World War II, its unemployment rate stood at 8.9 percent in April and is expected to approach 10 percent this year.

The unemployment rate and the credit card charge-off rate are closely related because consumers who lose their jobs are more likely to miss payments.

Card loss rates during economic stress generally rise along with unemployment rate, but bankers at J.P. Morgan Chase and Bank of America have warned recently that the loss rates could exceed the unemployment rate in this severe downturn.

Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence.

Some analysts and bank executives say that the average credit card charge-off rate could top 10 percent later this year, which means loan losses could reach US$70 billion to US$75 billion, dealing another heavy blow to the hard-up banking sector.

In a preemptive move to prevent bubble burst of the credit card industry, the bill, due to take effect next February, requires that credit card applicants who are under 21 must prove they can repay the money or that a parent or guardian is willing to pay off their debt if they default.

Protecting cardholders' rights

The bill severely restricts interest rate increases, excessive fees and penalties, as millions of credit card holders struggle with high balances amid a deep recession.

According to the bill, consumers will have to be notified of rate increases 45 days in advance.

The White House estimates that the industry could potentially lose about US$15 billion in penalty fees each year.

"With this new law, consumers will have the strong and reliable protections they deserve," Obama said at the signing ceremony.

"We will continue to press for reform that is built on transparency, accountability, and mutual responsibility -- values fundamental to the new foundation we seek to build for our economy," he said.

"We're not going to be giving people a free pass and we expect consumers to live within their means and pay what they owe. But we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives," he added.

To make up for some of the losses, credit card issuers could resort to tightening credit limits, raising application standards and closing accounts. They have also been slashing rewards, increasing interest rates and boosting fees to prevent further losses.

(Xinhua News Agency May 25, 2009)