AMES, Iowa -- Tahira Hira calls the new Credit Card Accountability, Responsibility and Disclosure Act (CARD), signed into law by President Obama last Friday, an important step in easing the country's debt crisis. The measure bans unfair rate increases and fee traps, requires more accountability by credit card companies all around, and institutes new protection for credit card users -- particularly students and young people.
But Hira, an Iowa State University professor of personal finance and consumer economics in the Department of Human Development and Family Studies, warns that the new legislation is not a substitute for Americans acting responsibly when using their credit cards. And Hira asserts that responsibility, or lack thereof, is what forced the new law onto the books.
"Both parties (borrowers and lenders) acted in an irresponsible fashion," said Hira, who is a member of the President's Advisory Council on Financial Literacy. "Consumers used credit cards to extend their incomes and support a lifestyle that was beyond their means. And credit card companies were also behaving irresponsibly by giving cards out to young people and others who were not yet ready to take the responsibility.
"So, when these two parties abdicated their sense of reasonability, the government had to enter into the picture and set boundaries to influence the behavior," she added.
An international leader in consumer credit research, Hira reports businesses spend millions of dollars to understand and then use the human psyche to their advantage -- "creating an environment where adults are 'trained' to act like children when it comes to handling money." While the new law should curtail some companies' predatory practices, she urges American consumers to become more aware of their own money realities.
"From a very early age, we need to prepare our children to be armed with appropriate values, attitudes, beliefs, information and knowledge about the basic principles of cash management, use of credit and the importance of saving," Hira said.
She sees greater financial literacy education -- like the Iowa Department of Education's mandate to make financial literacy a core component of K-12 curriculum -- working in harmony with the new law to assist college students. Students were previously lured into opening credit card accounts via promotional gifts, but not provided all the necessary information to understand the consequences of their actions, according to Hira.
"This new act is creating an environment in which young people will have an opportunity to succeed in handling their credit cards," she said. "An adult who co-signs will hopefully help the young person manage the use of the credit card wisely and make the payment on their behalf, if they can't do it themselves. Young people -- or adults for that matter -- who are not qualified or capable of handling the responsibility of a credit card will not have access to it, and that is how it should have been all along."
While she applauds the new credit card legislation, Hira says it's not a "silver bullet" for what really ails the country when it comes to debt.
"The real issue is not minimizing the debt, but promoting the responsible use of the debt," she said. "Debt itself is not 'good' or 'bad.' What is good and bad is how we use it. Are we responsible with the use of debt? Do we take those responsibilities seriously and hold up our end of the bargain? Do we make use of the debt for right or wrong reasons?
"We have a responsibility to learn about this powerful instrument and use it to enhance our financial well-being,
not destroy it," said Hira.