Credit Card Catastrophe

The House passed the Credit Cardholders Bill of Rights, and it’s being presented as a hallelujah moment for America’s burdened consumer. It isn’t, for two reasons. First, the ink isn’t even dry, and already there’s a clear way for banks to get around it. Second, it was never card policies that put people in trouble — it was their own stupidity, and we just can’t seem to legislate that away.

The bill restricts certain techniques used by credit card companies to squeeze a few more bucks out of the unsuspecting, such as double-billing cycles, interest-charge-maximizing payment application schedules, and sudden rate changes. All fine, but too bad none of that applies to small business credit cards, which are guaranteed by the holder’s personal assets and work exactly as consumer cards.

Gee, what a shock that a loophole made it into the bill. That couldn’t have come courtesy of bank lobbyists, could it? Of course it could and did, just as such loopholes always have and always will. Big business owns politicians, and the sooner ordinary citizens get that through their heads the sooner they’ll stop being shocked when they can’t seem to make ends meet by following society’s primrose path. Just as bankers paid politicians to roll back regulations that would have prevented the subprime mortgage crisis and then laughed as those same politicians used taxpayer funds to bail them out, so it goes with credit cards.

Of course there’s a loophole from the get-go. Credit card companies face rising delinquencies. Bank of America, for instance, reported that 7.8% of its credit card accounts were delinquent by more than 30 days in February, up from 5.9% one year prior. That’s part of why BofA lost $1.8 billion in its credit card business in the first quarter. It and other banks are scrambling to shore up profits ahead of a possible massive default wave like the one that swept the mortgage market. That’s why they’re sending out enticements for people to spend more, are raising rates on existing balances, cutting the duration of teaser rates, and cranking up late fees.

If you think the Obama administration is acting on your behalf because it cares about you, you’re new to politics. What it’s really doing is trying to get a populist measure on the books prior to what it sees as high chances that another bailout will be needed down the road. This way, it can say it tried to shape up credit card companies in a way that was good to voters, but ultimately needed to prop them up with taxpayer funds the same way it’s doing with other parts of the financial industry.

Meanwhile, the only true medicine for credit card consumers in over their heads is learning personal financial management. There’s no reason for carrying a balance on credit cards. It betrays woeful ignorance or stupidity, and neither is excusable. The percentage of credit card debt paying for necessities like medicine and food is very low. Most of it is runaway shopping, which the government thinks is necessary to the economy but that you know is not good for your personal budget.

From my new book:

You’ve heard the knee-jerk defenses of credit cards: they’re convenient, they provide a back-up in case of emergencies, they’re safer than cash in cases of theft or loss. All true, but debit cards provide those same benefits without any danger of debt. With credit cards, all of those benefits are overwhelmingly outweighed by the financial damage that credit card debt has caused. Like the toxic assets of bad loans in the credit crisis, though, the cards themselves are not the root problem. The idiots carrying them are. So, let’s focus on the idiots, again. Don’t you get tired of them?

Here’s quick proof that most people are financial imbeciles: only improperly used credit cards are profitable to their issuing banks. The banks keep issuing cards, though, so you know the majority of people use their cards improperly. Improperly means carrying a balance and paying interest and late fees.

Credit card industry revenue breaks down like this: 80 percent from interest payments and late fees, 20 percent in fees paid by merchants who accept the cards. If people smartened up, the 80 percent would go to zero and the 20 percent would probably drop dramatically because overall use of cards would decline as people stopped needing debt. Former card swipers would see that, since they pay their balance off each month anyway, they might as well pay cash and avoid the whole billing hassle. That’s why I claim that if everybody used their credit cards properly, the industry would disappear.

If you pay off the balance on a no-fee credit card every month, the joke’s on the issuing bank. They’re giving you a free loan while hoping with their greedy stone hearts that you slip up some time or, even better, repeatedly…forever. It’s so much fun to never slip up, though, and giggle each time they print the minimum payment bigger, or try to hide the balance in fine print, or send a letter encouraging you to use the card in new ways for “the lifestyle you deserve,” or offer an incentive interest rate on balance transfers. “Balance?” smart people say. “Oh, no, no, no my little banking demon friend. I never carry a balance, so there’s nothing to transfer, and I couldn’t care less what interest rate you’re offering because it never affects me. So go to hell.”

To financially smart people, credit cards pose no danger. To the really smart, they provide an easy way to use the bank to one’s advantage for a change.

Be really smart. Stop hoping and praying for Congress to set things right in the land of credit cards, and set them right for yourself.

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