Sunday, January 04, 2009

Gambling on Credit

Like buying a house, credit cards at one time were rewarded to those who were able to pay interest on the loans they represent. The change that was signaled in our mailboxes was much like the advance from mortgage qualification to sub-prime lending. When we became bombarded by constant pleas to take another credit card, to those of us who basically distrust anyone who tells us they're going to make an offer in our own best interest, it should have been suspicious to everyone. Sadly, it wasn't.

Those offers of low, low cost loans were never the signal of a new day dawning. On Wall Street, the bundles of subprime loans seemed to too many investors like a great idea. When the debt hit home, and they found out the bundle contained toxic loans, it was a shock. It shouldn't have been. Their irrational exuberance was and is a huge shock.

For the most part, though, American households were coasting into the same delusional thinking. While getting salaries adequate to take care of everyday expenses, most families took on debt for things like the dinner out, the special occasion outfit, the gift for the special occasion, the trip to the amusement park for the kids, and even the flu.

A lot of people seem to have forgotten that demands on families went ballistic during past months. When the gas that powered their cars to work galloped up in price to twice its last decades' price, then grocery prices followed skyward, then prices on literally everything that had to be transported went through the ceiling, few cut back. U.S. personal debt went to levels that had never been anticipated by most of us. Most families put the unplanned expenses onto credit cards.

This morning on NOW, Elizabeth Warren gave a bit of information that all of us need.

David Brancaccio (DB): Some people think that default on credit cards could be the next big hurricane that hits. What's your view on that?

Elizabeth Warren (EW): I think this is a real danger area ... We have about 50 million American families who can't pay off their credit cards. They're rolling them from one month to the next and that's a bad sign. This is short term, high-interest debt with a lot of tricks and traps in those contracts. We have 50 million families who are walking around carrying sticks of dynamite and the fuse is lit ... This is a bad, bad storm brewing.

DB: What do you regard as tricks and traps?

EW: Let me put it this way. In 1980, according to the Wall Street Journal, the typical credit card contract was about a page and a half long. It told you about the interest rate, about being late and that was pretty much it. Today, the typical credit card contract according to the Wall Street Journal is about 31 pages long. So, tricks and traps? It's that other 29 and a half pages.

DB: I have a 30-page credit card contract and I've never quite gotten through it.

EW: I teach contract law at Harvard Law School and I can't understand my credit card contract. I just can't. It's not designed to be read. Read the Government Accountability Office (GAO) study on this. The GAO looked at credit cards and they said: "Nobody can understand this stuff." Are you kidding me? And understand when you've got terms that say: "In effect, we'll charge anything we want any time we want for any reason or no reason at all," what's the point of reading it?

DB: Many people think they'll be okay if they pay their credit card bill on time and meet the monthly minimum payment. They didn't realize that the credit card companies could shift the rules, but they're wrong weren't they?

EW: They're really wrong. You would think that if you upheld your end of the contract that the contract was still binding. But in the case of credit cards, you would be wrong, because the credit card companies bury back in that language the right to change the terms of your credit card including the interest rate at any time for any reason and for no reason at all. So if you're kind of chugging along at the 7.99 percent interest rate you carefully shopped around for and you meet all the terms, your credit card company can decide it's time for 29.9 percent, and that's it. It's 29.9 percent. Pay up or it's over for you.

DB: But the credit card companies would probably say that they increased interest rates because the customer's so-called risk profile changed?

EW: That is what the credit card companies will say because I think it's probably pretty unpopular to say: "We did it because we could. We did it because we put it in the contract and we have the power and what are you going to do about it?" The notion that these credit card companies are pricing for risk is a public relations sham ... What the credit card companies are doing is maximizing their profits. The way they figured out to maximize their profits—thanks to the laws we have right now—is to draw in as many people as they can.

Every credit card for a credit card company is like a lottery ticket. They're just waiting to see who's going to maybe stumble a little. Maybe get into trouble on a car loan. Maybe nothing at all except they just look vulnerable. They're just in the right zip code. They're just the right profile for people who won't be able to run any place else. And those are the ones you slam. Those are the ones you hit with the 29 percent interest rate, the 35 percent interest rate, the new fees. And then, because of course if you can't pay it, then you get hit with a fee for not paying or for paying late, for going over limit. And the game is afoot. With any luck at all from the credit card company's perspective, these people will become little annuities that will just keep generating profits for the credit card companies for months, for years, maybe forever.

The legislation that has recently been passed is not retroactive. While in the future credit card companies have been prevented from levying outlandish interest rates on consumers without cause, and without warning, their practices in the past have bankrupted too many people.

Right wingers who like to blame the government for making loans to the poor will no doubt enjoy the spectacle of families unable to pay for the credit offers they accepted. (Just ran into one today, here, see comments 11 - 14 as of this writing.) There is, it seems, no joy like a winger's seeing some one lose a home or job, even though it makes the economy worse for them as well as for the losing person or family. Hopefully the free market crowd will learn some of the truths, as the information about slimey practices of lenders and credit card companies resounds in the news, and are revealed in shows like NOW and Bill Moyers' Journal. Okay, I tend to hope things will be clear and wingers will learn.

It could happen. However, if you are one of those who got squeezed into too much debt, there is help. Here.

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