Feb 192010

While I have a disclaimer on my blog here stating that the opinions here are not those of my employer I feel the need, considering the subject I am about to discuss, to state it again. What I am about to write is my opinion and my opinion alone, and in no way reflects the views of my employer.

Ok, I got that out of the way…Now…

On my way in to work this morning I heard a bit on the radio about how the new credit card regulations were going to be horrible for people who, traditionally, are responsible with their credit cards. These “responsible” credit card users are now going to be asked to carry the burden of the “irresponsible” people who have abused their credit cards, paid late, and carried high balances. This type of rage is generally accompanied by vitriol aimed at the Obama administration and how this is yet another step towards socialism.

There are certain aspects of this that I cannot dispute. Banks ARE going to raise fees on people who pay their balances on time and have good credit. They are, and have been, raising interest rates on those people for no good reason. This is, without question, a direct response to the new regulation and an effort by the credit industry to recoup the money they are going to lose as a result of it.

The question is – Who do you blame for where we are in this and why the Government stepped in to do something about it? The target of many  is, of course, those “irresponsible” people who let their debt get out of control.  I don’t think that’s fair, personally. Yes, there are a whole lot of people who totally got in over their head with credit that they probably shouldn’t have had to begin with. I don’t dispute that. What I have a problem with is the fact that the banks seem to be getting a free pass from the angry “responsible” folks over practices that, in my opinion, were designed from the very beginning to bury the poor in debt that they could never reasonably get out of.

Let’s face it – We live in a society where you are pretty much told that if you don’t have good credit rating you don’t count, and we are taught that the best way to establish credit is to get a credit card. If you’ve screwed your credit rating, though, the only credit cards you can get are pretty much designed from the beginning to bury you in fees.

Let’s say, for example, you get a card with a $300 credit limit that has a 29% interest rate. The bank that issues you the card hits you right up front with a $59 annual fee and a $150 “one time set up fee.” Both of these fees are conveniently charged to your new card. Now you have a card with a $300 limit and a $209 balance. Since I’m specifically using the “this card was given to a poor person” example, let’s say that shortly after getting the card the card holder needs groceries and has no money to spend on them. Thinking that they have $91 of “available” credit they go out and purchase $90 worth of groceries, bringing their balance up to $299. Still under their limit, right?

Well, no. Not so much. You see, when the billing cycle closes the bank charges the card holder interest on their balance. At 29% that is going to be somewhere in the area of $7 for the card holder. Now your balance is $306 and you’re over the limit, so tack another $39 on to your balance in overlimit fees.  As an added bonus, several companies would charge you overlimit fees if your balance was over your available credit at any time during the billing period, so even if you paid your balance in full the minute you go the bill you would still be hit for an additional overlimit fee on your next bill.

If you’re living paycheck-to-paycheck this kind of vicious cycle will bury you quickly, and I think it was intended to do so.  The company that issued you the card is going to make back the money that you actually spent on groceries in short order and at that point all you’re doing is providing them with a steady stream of fee an interest based income. Even if you eventually default on the card (which many people do) they made more than enough money off of you to justify the loss.

Is the bank responsible for the fact that these people maxed out their credit cards?  No, no they are not. Nobody showed up at their door and forced them to go out and max their credit cards. MANY of the people who maxed out their cards did so on frivolous purchases, and I do not dispute that. But you know what? There are also a lot of people who maxed out their cards simply trying to take care of their families. $90 can buy a lot of groceries. It can also pay for a trip to the doctor and a prescription. It can pay for clothing for school or fill up your gas tank a few times. It’s really easy to say that you don’t have to use your credit cards if you can actually afford to pay all your expenses without them.

If you want to get right down to it, the “responsible” credit card users are the ones who have been getting the free rides up until now. Banks make almost nothing off of people who pay their balances in full every month, so it seems to me that the people with really good credit who do so got away without paying higher fees because the “irresponsible” people were paying so much more on their cards.

Will this result in fewer poor people being offered credit? Undoubtedly. Is that a good thing? Yeah, I really think it is. As much as it sucks not having a credit card, it sucks more to get buried in debt that you can never realistically pay off. What’s the point in having a credit card if all it is going to do is make your credit WORSE?

I know this may sound like I’m against credit card companies making a profit, but I’m really not. I just think that they intentionally set up a lot of people to fail knowing they could make a lot of money off of them before they did so and I think that’s wrong.

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  One Response to “Some thoughts on credit”

  1. I”m not sure if I could agree more. My experience with the subprime CC companies, namely Household Bank and Capitol One have gotten me into a world of Credit problems. To this day I have an abhorrent Credit Score (double digits) mainly from accepting “credit offers to improve my credit”, using the same kinds of tactics outlined in your post. All of that being said, I did secure a construction loan for my house and was able to build it, but it cost me dearly, having to have the upfront dollars to put down nearly 80% of the cost for a mortgage. Had the telecom boom not happened I’d still be paying twice my mortgage to live in an apartment 1/2 the size of my home

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