Recession likely to change credit card habits THE ECONOMY IN TURMOIL

For decades, the credit card has symbolized the American way of life, but this recession may force both the symbol and the reality to change.

Spooked by plunging home prices and mounting job losses, consumers have cut back on credit card use, pumping less cash into an economy that depends on their ability and willingness to spend.

Meanwhile, Congress, reacting to complaints about credit card marketing practices, has tightened the rules on penalties and fees - spurring bankers to warn that consumer credit will become more costly and difficult to obtain.

The credit card issue is part of a larger problem of how to ensure that the financial system supplies enough credit to keep the economy moving without providing so much that it overheats and collapses.

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Industry critics say soaring debt helped cause this recession, which has now unleashed economic forces that will end the free-spending behavior symbolized by credit cards.

"As a society, we'll never be able to go back to the way things were," said Robert Manning, a professor of consumer behavior at Rochester (N.Y.) Institute of Technology and author of the anti-debt manifesto, "Credit Card Nation."

But James Chessen, chief economist for the American Bankers Association, said consumers rely on credit cards to enhance their lifestyles and will want credit available when better times return.

"The fundamental desire to buy things today and pay interest for the privilege will remain part of the culture," Chessen said.

Daniel Ray, editor in chief of CreditCards.com, said credit cards began as exclusive perks in the 1960s and 1970s but evolved into mass-market products in the 1980s and beyond thanks to the use of credit scoring technologies.

Using credit scores, he said, banks could tailor rates and terms to an individual's likelihood of making or missing payments. Cards became easy to obtain, even for people with low scores, because banks could align rates and penalties accordingly.

"They created a multitude of products for a multitude of needs," Ray said.

Federal Reserve figures chart the expansion of credit card use.

Each month the Fed surveys the total revolving debt carried by consumers, about 90 percent of which is charge card balances.

Fed figures show that in September 1988, consumers carried $177 billion in such revolving debt. By September 2008, that figure had risen more than five-fold to $977 billion.

Since October, however, the Fed survey shows that revolving debt has dropped for six months in a row.

"This hasn't happened for decades," Ray said.

Will retreat end?

This credit retreat could prove temporary or permanent. But Ray said the recent congressional legislation was intended to curb the marketing practices that enabled banks to expand card ownership over the last two decades.

"Issuers developed cards that were cheap up front and expensive on the back end," he said. "You could get zero percent for the first year, but after that, if you tripped up, the low introductory rate became very high in a hurry."

The bill signed by President Obama May 22 will prohibit banks from raising rates on existing balances unless a cardholder falls more than 60 days behind on minimum payments - eliminating so-called hair-trigger delinquencies - and make other changes, including requiring 45 days' notice before increasing interest rates.

The banking industry, which fought the changes, now warns that the bill will force issuers to restrict access to cards and raise the overall cost of borrowing.

"They affect the ability of credit card issuers to change their prices based on risk," said Chessen, with the Bankers Association, predicting that the law will mean "less credit extended, particularly to people who may not have perfect credit histories."

But critics say banks targeted vulnerable consumers and then profited when they missed payments or exceeded credit limits.

"There's a lot of anger out there; people have felt so manipulated," said San Francisco debt expert Erica Sandberg, author of the family finance guide, "Expecting Money."

But the credit card situation is just a microcosm of the larger wave of debt that has swamped the economy in the past 20 years.

Huge household debt

The Federal Reserve Bank of San Francisco recently issued a report on total household debt - everything from mortgages to credit cards. It showed that consumers doubled their debt load over the last two decades. By 2007, the average household had $1.33 in obligations for every $1 in personal disposable income.

"For many U.S. households, current debt levels appear too high," the report said.

Manning, the credit industry critic, said now that the recession has thrown millions out of work, that burden has become more difficult to sustain.

"We have more debt than at any other time in history and less income to pay it back," he said. "That's really where we are right now."