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Lovely reader Reese (a little link love for you) wrote a comment in response to my recent post Prepare For Your Credit Card Interest Rates To Jump Without Much Notice.

Reese brought some excellent points that we should discuss. Pull up a chair my friend.

“I’ve read some of your cc stories for a couple of months now but have not commented until now. If credit card companies and banks are evil, why do we not ‘ban’ them?”

I think that a credit card, when used appropriately is a great financial transaction tool that provides more protection than cash, checks or a debit card. I love credit cards. I get free flights for using my credit card, free cruises and other free perks, you can also, and because I pay my bill off in full each month, I get all that stuff for free. If I carried a balance, it would cost me dearly. I’m sure my credit card companies think I’m a deadbeat because they don’t make money off me. Oh well, I think I can sleep well anyway.

We also need access to credit to fuel our economy. We are called consumers for a reason. Our job is to consume so business has to manufacture or produce, so jobs are created and keep the cycle of economic life going. The government, business and banks would prefer that as we consumers we simply adopt the philosophy, Hakuna Matata and not worry about our debt levels.

What I do have a problem with is when commercial groups keep paying out the line, more, more, more and then set the hook to leave consumers financially disadvantaged.

Credit Card Terms and ConditionsWhen you look at the terms and conditions of a credit card you will find out that the rules of the card are all set out in there. Creditors do a good job of laying the whole tamale out in the terms. I can’t fault them there.

But lenders know people either don’t want to or it just isn’t practical to read all that junk. If you’ve ever bought a house, did you read the 300 pages of closing documents? I didn’t think so. Before you took out your last credit card, did you even familiarize yourself with the terms and conditions? Really?

You will find that when people don’t pay attention to the terms and conditions of their cards that the consequences can be very severe.

For example:

  • If a credit card has a fixed interest rate, then why can it be changed with 15 days notice. How fixed is that?
  • If your payment is one minute late does that really justify a $39 late charge?
  • If you’ve proven that you are not paying off the balance and the lender knows that you are probably stuck on the card, does it make it right to jack up the rate?
  • If you are late on one bill, does that give the rest of your lenders the right to raise your interest rates to the maximum available by law?
  • If the amount of time you have to pay your bill drops from 30 days to 20 days giving you less time to pay than what your originally agreed to, is that fair?

“Would you propose that such companies make their credit available to people, for ANY REASON (versus, say, the Kiva style which works on business proposals and building economies) at super low rates?”

Interesting that you mention Kiva. I’m a big funder of Kiva loans (see my profile) but we all need to remember that the interest rates offered to the borrower are no where near as low as the rates of returns that us lenders get. The in-country lenders mark the rates way up and make a profit to continue their value services from the rate spread. But I’m happy to be a wholesale lender to these groups that then lend the money out to the customer. And I’m also very happy for MBNA, Bank of America, Chase, Citibank, Sears, AT&T and all the rest to make a reasonable profit as well. But let’s add to that fairness and transparency as well.

If you take a look at some of the underlying micro-lenders you find profit margins of 60% The average interest rate the end borrowers pay to the field partner micro-lender is 21% with some as high as 40%. Look at this Kiva partner whose loans are at 36%.

“Would the companies not simply fly the coop and go into another money-making business?”

Zopa Loan RequestsI agree completely and this is why I’m not a big fan of peer-to-peer lending. It’s not just companies that can borrow and run, but individuals as well. If you look on some of the leading P2P lending sites like Zopa, Prosper or Lending Club, you will find lots of people seeking loans for debt consolidation or to get out of debt (click on Zopa graphic to the left). You simply can’t borrow your way out of debt and if the borrowers haven’t tackled the underlying issues that got them in trouble in the first place, watch out. In fact, if you look at the nearly 3,000 accounts of delinquent Prosper loans you will see what I’m talking about.

While people will repay those loans, as many as 30% will not. Lending from your heart is fine as long as you have no need or expectation for that money to be returned to you.

“I’m bothered by the overriding theme in some entries that those who get into credit card trouble are ‘victims’ of credit card companies. While I’m not touting the cc companies as ethical by any means, how else will people pay for things they want if no credit were available?”

My actual belief is that people are less victims and more just simply ignorant of financial issues or simply don’t want to participate in their financial health and there are a number of reasons why that is.

After all these years I’ve never met anyone that ever had a gun put to their head and forced to take out a loan. Nobody has ever been kidnapped and forced to sign the documents or use the card. Although I did have a case recently where the neighborhood door-to-door lender kidnapped the single mom, put her in his trunk and drove her down to the docks and told her that if she didn’t pay, he’d kill her. Obviously not someone from your local Beneficial Finance office.

People are not powerless because we all have the power inside of us to protect ourselves from financial misfortune. If we can drive a car down the road and not go across the painted line why can’t we hold a credit card in our pocket and not let it get out of control? In the U.S. nearly 61% of credit cardholders do not pay off their balance each month.

Now, all of that being said, there are plenty of Harvard educated marketing and business executives that work every day to come up with new profit making plans for the banks off of consumers, platoons of white coated scientists’ secretly studying the best place to put the generic or store items in the supermarket (always to the right of the name brand) and what scent stimulates women to by more sweaters, (chocolate chip cookie aroma). For more information on what tricks are used to make us buy when we don’t want to, see “Why We Buy: The Science Of Shopping” (Paco Underhill).

It’s not that consumers are victims, like in a mugging, but the average consumer is no where near as smart or educated as credit card or bank executives that are meeting in groups on new ways to make more off you.

“If we did not have credit, how would they pay their bills and consume? Would they find other ways to make ends meet and buy THINGS? Are credit card companies to blame for the desire to have a ‘comfortable’ life and ‘things’ in that life? Or are they a vehicle that fuels an addiction?”

The answer to that is definitely the banks are not responsible for us having those urges to spend. The desire to pursue pleasure over pain and to seek what we feel will bring us happiness is coded in the human BIOS. Lenders just play on that. Marketers know how to tap into our overriding desire to buy now and pay latter. We do it to ourselves when we discount the value of future repayment pain as far less then the wealth of current pleasure.

Many people I have worked with do have tremendous underlying issues that manifest themselves in debt. People with manic-depression, personality disorders, depression, co-dependents, guilty, lonely, empty, those with behavior issues, compulsive shoppers, etc. As one woman told me “Shopping is my heroin and the Discover card is my needle.”

“It is similar to, say, drugs. The ‘availability’ of drugs does not force a person to become a user–they make a choice as to whether they will use or not. And so it goes with credit. Were credit not available, what other choices would people make? Would we see a debt-less society? And if the answer to that is yes, then the problem lies not with the availability of credit but rather how it is utilized by people.”

Credit and food are very close as well. Both food and credit and items that we normally consume on a daily basis, they are legal, respectable, readily available and subject to abuse. It is interesting to see our obesity rate increasing along with our consumer debt levels. Correlation?

The primary difference between credit and drugs is the social acceptance of what we can do with credit. With credit you can boost your self-esteem and self-worth. You can create a life you feel offers you superior advantages and rewards. And most of all, as the song says “All the happiness in the world can’t buy money”. From the track “Can’t Buy You Money”.

But at least from my little island in the galaxy I think I can do more to highlight what to watch out for or even show people how to be smart about looking for financial products, rather than trying to talk at people about what is prudent, responsible and safe. When you try to do that people glaze over and tune out. I can’t teach without students. Do people want to read about abstinence or how to use a condom?

My ongoing quest is to figure out how I can make fiscal responsibility, sexy and more desirable than having the latest car the marketers push, the techno-gadget that just came out, or an exotic vacation. I’m open to all suggestions. It’s an uphill battle.

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Steve

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