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March 4th, 2010


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02:35 pm - Credit where credit is due...
In case you weren't aware, new credit card regulations went into effect in February. As one who doesn't tend to use credit cards as credit, I don't usually spend a whole lot of time digging through my statements for the fine print. Balance due, payment, done...

But under the new regulations, banks are required to make statements easier to read. This involves putting things like terms, interest rates, and minimum payments in big, visible print on the statement. So I couldn't help but notice them.

And holy crap.

Of course, I realized that credit card interest rates, fees and penalties were insane. That's why I never racked up credit card debt... asking family for a loan, paycheck advances from an employer, or payment deferral from a creditor were generally the lines of defense I employed when I was a penniless college student. And I guess I'm glad I did.

One Month worth of charges on my personal credit card. Nothing serious this month... a dentist visit, oil change for the car, a couple of dinners out, vet bill for the cats. If I pay only the minimum payment for this month of lavish expenses, I would pay off the balance owed in about 17 years. During that time, I would pay the bank an estimated total of $3,321.00 in interest.

Should I miss a payment? If I did, I would pay a $39 late fee, and my interest would increase to a "Penalty APR" of 29.99%. Paying my new minimum under that scenario means that it would take 24.8 years to pay off my 1 month of credit.

Holy f'ing crap.

So this seems like a very interesting example of "success disparity" in modern society. More colloquially referred to as the "Section 8 Satellite phenomenon"... Wherein if you drive through an upscale suburban neighborhood, you'll see a satellite dish on the top of every 5th or 6th house, and a Hummer in a driveway or two. On the other hand, if you drive through a Section 8 neighborhood, you'll see satellite dishes on every other building, and a pimpmobile in every 5th driveway.

I used to think that was just people being stupid with their money, and digging themselves into debt. Which, of course, it is... But it's more complicated than that. As you achieve certain levels of success, your measures of success shift. You want a nice house, and some cash in savings, and to go on a relaxing vacation once a year. When you live in a tiny flat and are shaking down the couch for coffee money, getting a big-screen TV, or satellite, or spinning chrome wheels become the measures of success. This is one of the reasons why Rent-A-Center has been around since the 80's, while there hasn't exactly been a massive explosion of travel agents in the inner-cities...

And I think this is what makes credit cards so insidious. Used properly, they're a leveraged convenience. A way to not have to carry $500 worth of cash into your dentist's office when you have a root canal treated. They're the reason why check fraud is half as prevalent now as it was a decade ago (by incidence... by dollars, it's way up, but that's because fraud cases have become much bolder).

On the other hand, they're a magic sliver of metal and plastic that gives out free money! Or, at least, that's what a lot of people think they are. When you have to write a check to Rent-a-Center, you might have to wait 6 months. When you can use a credit card, you can have it today! And as the credit card wave grew, that temptation worked its way up the economic chain as the "new status symbols" of Hummers and LCD TVs and Ethan Allen furniture started to sound like good investments.

But make no mistake, credit cards are investments. They're risky, they're prone to default, and an awful lot of people use them as a convenience, not a line of credit. (Like me!!) People like me are quite literally making it more expensive for those less fortunate than I to have credit. You need to have a substantial interest rate to generate investment in credit funds. If you didn't have investments, then you couldn't offer people credit. When you have freeloading balance-payers on the sheet, you need to have an even higher interest rate to carry their float until the end of the month.

So, from that perspective, the 18.99% APR on a credit card isn't that bad. 10% for investors, 5% for overhead and profit, and 3-4% as a hedge against borrowers who aren't paying into the system, because they never incur interest charges. Show signs of default, and we double your rate... It may sound predatory, but if they can extract that 18.99% of committed value from you in a shorter time before you default, that's a pretty sound business strategy. Loans aren't gifts, and investors will bail if they don't get paid. I can understand and appreciate that. The system only works so long as there's profit in it. Otherwise, investors might as well bury their money in a mattress, because it'd be a lot safer there if it's not growing.

But if you're on the opposite side of that investment instrument, think long and hard about that big screen TV. It may be a measure of success, but it's one that you might be paying off for 17+ years if you can't actually afford it. If money's tight, suddenly some deep austerity measures sound better after you run the numbers... I like beans and peanut butter a lot better than indentured servitude.

The system works - credit is available and simplifying. You're just not going to like it very much if you use it without understanding it.

As horrifying as the numbers are, I'm betting this new easy-to-read bill has almost zero effect on America's love of credit. Printing 29.99% APR in big bold letters isn't going to stop shoppers any more than big, bold Surgeon General warnings stop smokers.
Current Mood: nauseatednauseated

(3 comments | Leave a comment)

Comments:


[User Picture]
From:cynic51
Date:March 5th, 2010 01:38 am (UTC)
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>>printing 29.99% APR in big bold letters isn't going to stop shoppers any >>more than big, bold Surgeon General warnings stop smokers.
You're probably correct, but I hope not. Not that it matters to me, since I've never not paid my balance off every month.
[User Picture]
From:bunny42
Date:March 6th, 2010 04:59 pm (UTC)
(Link)
I've been using credit cards for... well... a number of years, and I've always wondered how people could get approval for 15-20 different cards. Sure, the companies inundate you with "You are already approved" offers, but the one time I tried to take advantage of that, to transfer an unpaid balance from one card to a new one with a lower interest rate, I was introduced to the fine print: UP TO $5,000, it read. That "up to" part is the killer. I got back an approval offer for $500, which I declined, and ya know what? The wankers sent it to Equifax as a disapproved credit application.

With that in mind, it's a mystery to me how people drowning in credit card debt were able to obtain all of those cards in the first place. Back during the Carter years, I nearly lost my first little house I had ever owned, due to insane inflation and usurious interest rates. I resorted to apples with peanut butter and renting two of my rooms to total strangers, in order to stay afloat. Not that I would ever have done so, myself, but how did those people in the news get all those cards? I mean, three or four Visas, MasterCards, major retail stores, gas cards, Diner's Club, you name it. How's that work, anyway?

As for today, you may say the system works, but I maintain that the credit card companies are sharks, every last one of them, (except, maybe, American Express, whose profit margins are driven by a higher cut from the businesses), and a pox on all of their houses. They created this mess by mindlessly extending credit to hoards of people who could not afford it. How could all of those defaults have looked like a good business proposition? I remain flummoxed.
[User Picture]
From:wandering_rangr
Date:March 9th, 2010 12:05 am (UTC)
(Link)
The part that's the worse about the new credit card act?

The rider allowing loaded firearms to be carried in all national parks.

Don't even get me started on this one...

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