Credit card companies are bracing for the worst year in the industry’s history. A bank stress test issued this month by the Federal Reserve suggests that America’s largest banks – including Citigroup, Wells Fargo, Capital One and Bank of America – could expect $82.4 billion in credit card losses by the end of 2010. Regulators are calling the impending implosion an “adverse economic situation.” 

That’s putting it mildly.

Today’s adverse economic situation has had life-altering consequences for people around the world. A massive wave of home forclosures drove real estate values and property transactions down to their lowest point in twenty years. The stock market collapse destroyed an estimated 20 percent of the value of global assets and sent US unemployment rates skyrocketing to 15.8 percent. 

Now, credit cards companies are lowering credit lines, imposing extra fees and retroactively increasing interest rates on millions of consumers, causing more than 10 percent of people to default on their payments. 

“Credit card companies are part of an honest industry just trying to make 30 percent on a buck,” said the masterful Stephen Colbert in a recent bit that poked fun of the credit card crisis. “Being in a financial hole is as American as borrowing apple pie.” To be sure, living in debt is a way of life for many of us – starting from college and extending well into adulthood. But the obstacles to digging ourselves out of debt are piling high. 

Facing a desperate race to collect before consumers can claim bankruptcy, credit card companies are trying to squeeze out every last dime from every consumer they can. Last year alone they collected $18 billion in penalty fees. That statistic hits home, since research shows that most Americans are using credit cards for basic necessities like groceries, gas, car repairs, medical expenses and prescription drugs. Credit cards have become essential tools for functioning in today’s economy, but even so, there are few rules protecting consumers from abusive industry practices.

As research group Demos points out, it has been nearly twenty years since the credit card industry was deregulated with the promise of bringing greater competition and lower prices to consumers. That promise fell short big-time. “Under the shield of deregulation, credit card companies have shifted the cost of credit to individuals least able to afford it, while at the same time generating some of the highest profits in the entire banking sector,” Demos says. “As [our research] report shows, low-income individuals, African Americans, Latinos and single females bear the brunt of the cost of credit card deregulation through excessive fees and high interest rates.”

This brings up an important point, one that’s often debated by the so-called corporate responsibility community. Many of us like to think that market forces are the ultimate catalyst pressuring companies to behave ethically and responsibly. Pointing to worthy case examples, we hope that changing conditions and competitive pressures will pull industries in a more amenable direction. That optimism is not always warranted, though. Having been left to it’s own devices for so long, the credit card industry is the latest poster child for why we need a stronger regulatory net.

The CARD (Credit Card Accountability, Responsibility and Disclosure) Act of 2009 comes before the Senate today. This legislation, introduced by Banking Committee Chairman Chris Dodd, would amend the Consumer Credit Protection Act to ban abusive credit practices, enhance consumer disclosures and protect underage consumers.

“We are on the verge of a historic victory for hardworking American families that have suffered for far too long at the hands of credit card companies,” said Senator Dodd in a recent statement. “I am committed to working with President Obama and my colleagues to ensure that [CARD] passes with overwhelming support.  As President Obama said today, enough is enough.  It’s time to put an end to the abusive credit card practices that drive millions of American families further into debt.”

The bank lobby is strong in Washington. The industry asserts that new legislation could cripple its ability to deal with rising defaults, manage high-risk accounts and extend credit to certain people during the recession. 

In the event that the legislation does pass today, banks are expected to look to new revenue sources to make up for lost income. According to bank officials and trade groups, banks will likely target customers with sterling credit, who typically pay off their full balances at the end of each month. These customers can look forward to revived annual fees, curtailed cash-back rules, reduced rewards programs, and the immediate charging of interest on purchases made.

Going forward, it looks like people with great credit will have to subsidize those with riskier profiles. Fair? Probably not. But again, that’s beside the industry’s point.