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Who's Fault: Credit Card Companies or Consumer?
Posted by averagejoetoceo • 11/11/07 • Subscribe to this Discussion [RSS] • Report This Topic
Topics: credit cards, debt
Do you think that the credit card companies should shoulder at least some of the blame for society's debt problem, or should be blame be shouldered soley by the person or family in debt?
User Comments
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I'm guessing there's blame in several places, but the credit card companies ability to raise interest rates to over 30% in the U.S. because a person has made a couple late payments is a huge problem. And they can do this whether or not you are late on their payments or another company's. Those kind of practices smell like loan sharking. Then there's the aggressive marketing strategies these companies use.-
I believe credit cards should be used responsibly, yet I have not always honored that for myself. In fact, I am a revolver now
Frivolous credit card spending and necessities like health care, car repairs, etc are different in my mind..
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I used to work for *the* credit scoring company and I learned much about how their analytical scorecards work. Credit card companies use sophisticated modeling to target consumers. Do I believe credit card companies are eating people alive? Yes, especially revolvers, those who let their credit card balance revolve every month. Interest is a significant source of revenue for financial lenders.
When all is said and done, however, it is the ultimate responsibility of consumers to be wise with credit card usage.
Has anyone seen that documentary Maxed Out? It is worth a view!
www.maxedoutmovie.com/-
"When all is said and done, however, it is the ultimate responsibility of consumers to be wise with credit card usage."
True. But how about those times when you need medical care you can't afford? That's not an uncommon scenario in the U.S. -
Mark, with current bankruptcy laws you are better off letting the medical debt pile up on the hospitals books in the form of unpaid invoices instead of on one's credit cards. -
Definitely agree that letting medical bills pile up is a much better idea than to use credit to pay medical bills, but I'm curious about the reference to current bankruptcy law and how that connects? It's harder for many middle-class debtors to discharge medical debt than it was prior to the 2005 law change. -
I was thinking more along the lines of the effects Mark mentioned about late payments on one card affecting the interest rates on other cards than about bankruptcy law. I know hospitals can and will report you to the credit agencies but probably not as quickly as a credit card company.
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That's definitely true, and aside from the credit ramifications, hospitals don't charge 29.9% interest. That's more critical than it might sound like to someone who has never done the math, because it is entirely possible for a person who has a high interest rate and possibly fees along with that to go along making minimum payments on his credit cards every month without ever seeing the balance decline. And if he's not able to make the minimum payment but does make SOME payment, that won't stop late charges and over-the-limit charges from a credit card company (a scenario in which someone might be paying $50/month and accruing fees and interest of $100/month, so watching balances continue to rise every month even as he's struggling to pay). While medical providers often have a provision for interest, they don't always apply it if payments are made on a regular basis, and it is virtually never at the punitive level credit cards are likely to impose in these circumstances.
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What made me think about letting the medical bills ride vs. paying them via credit card was a result of personal experience. I had surgery a couple years ago and due to some problem with Blue Cross they did not pay the bill in a timely manner. I knew I had followed all the rules and the surgery would eventually be paid for by the insurance company.
The hospital even suggested I just pay it off (it was about $4500) and let the insurance company reimburse me. I declined and let it pile up fees, much smaller fees than a credit card would have involved, and let them work it out with the insurance company since they have the experts in insurance claims and I do not.
It was resolved after about six months without any real effect on my own personal credit.
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There is plenty of blame to go around but for me it boils down to the person who uses the credit card. I can't think of a good analogy at the moment that doesn't reduce the issue a simplicity that distorts.
The fact remains that there are people like me and my partner who use credit cards responsibly. A credit card is a tool that can be used and abused. It would be nice if there were better regulations controlling fees and interest rates. It would also be nice if there was more transparency in the credit card industry. But the best thing, would be if people did not use them as though the credit limit part of their liquid assets to be used as cash when they see something they want at the mall.-
My biggest complaint is the bondage that happens when credit card companies increase the interest to an ungodly amount that forever places the consumer into a slave position. See the movie Maxed Out - it is a heartbreaking account of what credit card debt can do to people.
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"The fact remains that there are people like me and my partner who use credit cards responsibly."
That's a nice thought. I think it would be more accurate if you were to say, "The fact remains that there are people like me and my partner who are fortunate enough to be able to understand the fine print, to have the education and resources to know what it means to use credit cards responsibly, to make good decisions about which credit cards to use...." and so on and so on and so on. The simple fact is that the world is full of people who have never had the upbringing or instruction or education or just plain life experience to tell them to LOOK for those things, let alone how to understand them when they get there. Yes, there are some people who abuse credit cards, but I strongly suspect those numbers are much smaller than you think (the spectacular failure of the 2005 "bankruptcy reform" alone provides overwhelming evidence of that). -
I was hoping you'd weigh in here, Tiffany.
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TA: Do you think its really fair to say that people cannot understand the basics of not using more credit than you can pay off in a reasonable amount of time? I agree that many people do not read the fine print, but I refuse to believe people are too simpleminded to understand that if they can't afford to pay for a vacation in cash that putting it on a credit card is good idea.
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I more than believe it, JD--I've seen it hundreds of times. You're oversimplifying to look at big-ticket items and whether or not people can pay cash for them as the only test, for a number of reasons:
-many "experts" specifically list big ticket items like vacations and furniture as the "exception" in which it makes sense to spend money on something you will have to pay off over time--it sounds like you disagree, and if you do, I agree with you, but it's asking a lot to expect the average person with no financial experience to "know better" when there is apparently reputable financial advice out there indicating the opposite. And, in fact, for a person who understands interest rates and fees and how much money they're actually going to end up paying, it might well be a viable decision, just as many people use credit for their holiday purchases and accept up front that they'll be paying a premium for the privilege of paying it off over three or four months rather than up front.
-Many people who get into credit card trouble do so not for luxury items like you describe, but filling shortfalls in their household budgets in a short-term crunch or by attempting to cover medical bills or other unexpected necessary expenses. When that's the case, they often get bad "advice" from people like the (apparently kind and helpful) hospital billing departments, who are happy to explain the advantages of shifting this balance to credit. You obviously know better. Count yourself lucky. Hundreds of thousands of people every year make that financially devastating transfer because they believe they won't be able to get medical care for themselves or their children if they don't.
-People tend to underestimate the recovery period when they have short-term problems. For instance, you're unexpectedly laid off for a month, and the landlord still wants his payment and your kids are still hungry. Spending a couple of thousand dollars on credit cards to cover those expenses can be enough to break a family's budget permanantly, if they were just getting by to begin with, but the combination of what sounds like a relatively low overall balance, the expectation of income restored in just a few weeks, and lack of other options for keeping a roof over the family's head during that gap make it seem workable. Often, it's simply not.
This list could go on almost indefinitely. -
Good points all TA.
I am firmly in the middle class and so are most of my friends. So I am not exposed to many people who are using revolving credit to cover a monthly income gap. You are right that people who are up against the wall financially and then use credit cards to try to catch up are screwed. -
You're in good company, Techfun. The vision of people buying luxury goods and then cheerfully discharging their debts in bankruptcy when they'd run up more credit card bills than they could manage (along with a lobbying effort that lasted a decade and cost hundreds of millions of dollars) played a significant role in the passage of the 2005 bankruptcy reforms.
However, the fact that the Chapter 7 bankruptcy means test drew a line at the median income in the debtor's home state ended up revealing interesting data--almost all of those seeking to file under Chapter 7 fell below the state's median income. The credit counseling requirement before filing was meant (or at least, its stated purpose was) to ensure that bankruptcy petitioners had explored and were aware of other options before filing bankruptcy--but the "deadbeat" theory took another big hit when credit counseling agencies began reporting statistics and it turned out that fewer than 4% of those seeking pre-bankruptcy credit counseling were deemed by the credit counselors to have any other viable option.
There is also recent data indicating that approximately half of all consumer bankruptcy filings are due at least in part to illness/injury resulting in either significant lost income or unexpected medical debt. Depending upon where you gather your statistics, anywhere between 70 and 85% of bankruptcies are attributable to unexpected medical expenses, job loss, death in the family or divorce.
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One other comment is that I left *the* credit scoring company because I realized that we were in business because our tools were used to keep people in debt. My pay and benefits all rode on the back of consumers who accrued debt of some sort, including mortgage, car, small businesss and personal lines of credit.
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Like several people above have said, there's plenty of blame to go around. But looking at the groups that credit card companies are in fact targeting calls all of their claims into question. For instance, families within one year out of bankruptcy are more than three times as likely to receive credit solicitations than those with no bankruptcy on their credit histories. Other aggressively targeted groups include college students and the elderly--both groups generally known to have little income and, in the case of the elderly, income that is not likely to increase. These credit cards are often marketed (much in the same way that the subprime mortgage loans that are now collapsing all around us were) in misleading terms, with boldly advertised teaser rates and the real information buried in pages of fine print. The default rates that GlobalGirl mentioned are often universal, which means that if you've got four or five credit accounts and one payment on one of those accounts is late, all of them may be able to raise your interest rates through the roof. And, for the most part, the "just call" advice that so many financial management sites glibly offer is useless--the credit card companies that target these people make the bulk of their revenues on late fees and over-the-limit charges and usually aren't in the least bit interested in working with a consumer to mitigate those things. And that's just the mainstream creditors who target those with lower income or questionable credit. There's a whole other tier that targets the desperate and isn't designed to actually ever give the person credit at all--credit cards issued with high interest rates and $300 credit limits that have more than $200 in fees applied before the credit card ever arrives, so that it takes six months or a year of minimum payments (assuming there's never a late payment) just to pay down the starting balance.
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TotalAttorneys, thanks for your legal comments... I agree. Financial lenders bank (sorry for the pun) on the fact that consumers will not read the itty bitty fine print one receives at the time of the offer and/or acceptance of their terms.
I think many will agree that with the current economic crisis hitting the mortgage industry, credit card lenders are not far behind. Surely, this impacts all of us, those with credit and those without.
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it is a vicious cycle. If you speak from a macro-economics point of view, it is a good thing eventually. But still from a sociological point of view it is very bad. Then again, as long as people can borrow or enjoy now and pay later, there will always be debt and such credit companies having their heydays. It is in our culture to be not content with ourselves and spend beyond our means.
blogmiracle.com -
To what macro-economic point of view are you referring?
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I'd guess that seenijg is referring to the idea that if you ignore the fees and interest, the credit card use/abuse is still spending that can benefit the wider economy by increasing consumer purchasing. I don't think that results in an overall benefit because you can't remove those fees and interest charges.
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