The latest theme in recessionary misery: those nasty credit cards.
Here in Canada, the federal government is working on new rules for card issuers, including a requirement for warning labels about interest rates. In the United States, there's a credit card holder's bill of rights in the offing.
Between their high interest rates and onerous fees, terms and conditions, credit card companies certainly stand out for taking advantage of customers in tough times. But the real story of how credit cards came to be the villain of the moment has to do with financial illiteracy.
"Regardless of this recession, people have been relying far too heavily on credit to bridge the gap between their income and their expenses," said Laurie Campbell, executive director of Credit Canada, a non-profit credit counselling service.
"When it comes to credit cards, people tend to impulse purchase and they consider them an extension of their income sometimes."
The recession has simply made this problem worse, Ms. Campbell said. "People often rely on credit cards when there's nowhere else to go."
The federal government plans to introduce legislation that would provide warnings on credit card documents about the long-term effects of paying high card interest rates, and establish a minimum 21-day grace period on credit cards. The grace period refers to the span between the day a monthly credit card bill is issued and the payment due date.
According to the federal Financial Consumer Agency of Canada, grace periods for cards range from 15 to 26 days for cards issued by banks and credit unions. Now, let's say the government sets a standard that gives you a few extra days to make your monthly card payment - the full amount, the monthly minimum or something in between. Is that going to make a difference to financially struggling people?
"Chances are, it's not," Ms. Campbell said. "Canadians have never had higher debt than they have today and to start to manage that in a better way is going to take a lot more than extending a grace period."
Some experts believe credit cards are the next critical problem for the banking industry. Earlier this week, the chief executive officer of U.S. financial giant JPMorgan Chase said the firm's credit card division is the one facing the highest stress level in the recession. "In the credit card business, unemployment and home prices are driving losses way beyond what we would have expected," Jamie Dimon said.
The latest analysis of household indebtedness by CIBC World Markets shows that the loss rate for credit card companies surged 16 per cent in the fourth quarter of last year. Card companies were losing roughly 4.5 cents on the dollar in December, the highest rate since 2005.
Ms. Campbell can see a trickle-down effect in the 30-per-cent, year-over-year jump in the number of people coming to her agency for help. She's also noticed that while the recession is still young, the number of consumer bankruptcies has spiked higher in the past few months. "Normally, there's a lag of at least six months between bankruptcies and a recession."
In this or any other environment, some credit card practices are tough to take. Good examples are the way some companies jack up their already high interest rates if you miss two consecutive payments, the surcharges they apply on foreign exchange transactions and fees on inactive accounts.
But, again, these practices are not the reason why people can't pay their debts today. Misuse of credit is the real problem.
Ms. Campbell said the government's plan to provide warning labels on credit card documents could help in that regard. "But this is a bandage approach to a much bigger issue, which is why we have such an indebted society and how we as a community can educate people over a period of time to understand credit, debt, money management - the whole nine yards."
Teaching financial literacy to young people is what Ms. Campbell suggests. Just as the government is borrowing the idea of cigarette warning labels for credit cards, she believes that young people should be drilled about the perils of debt in the same way as they're warned about smoking.
Ultimately, the message comes down to not using credit to buy things you have no hope of paying for.
"Unfortunately," Ms. Campbell said, "people can't even distinguish between what they can and can't afford."
Rob Carrick