Bankruptcy

Thorne's Post to the NYT's blog, "Room for Debate"

By Debb Thorne

A couple days ago, I was asked to write up a comment/response to the following statement for the NYT?s blog, ?Room for Debate: A Running Commentary on the News?:

?As Congress and federal regulators move to limit how much banks can charge credit card holders who?ve fallen behind on payments, banks are starting to think about making up the lost income by going after those with good credit ? like reviving annual fees and eliminating or reducing grace periods for paying off card debt. We asked some experts, should responsible card users (those who typically pay off their monthly charges) bear the cost of credit card services as revenues decline from those with credit problems? Would that shift penalize habits of thrift??

For what it?s worth, my response is written below. After listening to the stories of indebted Americans for the past decade, I have had it up to here with the portrayals of them as irresponsible deadbeats--so very few fit this stereotype. Therefore, consider yourself forewarned--my pro-consumer perspective is obvious.

Those who pay off their balances every month are not the only ?responsible? consumers. There are millions of Americans who, although they may carry a balance (i.e., ?revolvers?), still make that minimum monthly payment religiously and responsibly. Indeed, these folks are the financial ?sweet spot? for the credit card lending industry, are they not?

It?s important and only fair to acknowledge that just because one carries a balance does not necessarily mean that one is irresponsible ? maybe just in a lower socioeconomic class. On the other side of that same coin is the assumption that those who pay off their card balance each month are necessarily ?thrifty.? I would argue that the issue is more one of financial privilege and less of thrift.

Now that there are some limits on how much the banks can scrape off the backs of the most vulnerable, they want to feed off of the rest of us.

We need to be honest and transparent about the core objective of the banks with this potential expansion in fees. They want to maintain credit card lending as one of the most profitable arms of their industry. Historically, they?ve done it off the backs of the lower income and financially vulnerable ? those who carry a balance or who might be less financially stable and therefore more likely to miss a payment. Now that there are some limits on how much wealth the banks can scrape off the backs of the most vulnerable, they want to start feeding off of the rest of us. The fundamental issue here is the profit margin of the lending industry.

If lenders had maintained reasonable fees and interest rates to begin with, typical revolvers would not default and would continue to make those minimum monthly payments until they went to their graves, and the profits of card lenders would still be beyond comfortable.

The shift toward more fees for everyone isn?t about fairness. The lending industry wants an increased profit margin, and if that means achieving it through other means (charging new and expanded fees to use their cards), they?ll do it. Don?t blame the revolver who has been making his or her minimum payment for years but has now lost a job or gotten sick and has therefore fallen behind on payments. (Remember, once the borrower slips up and is late with a payment, he or she is severely punished: the lender begins charging insanely high interest rates and single-handedly pushes many of them to the brink of bankruptcy.)

Put the blame where it belongs: on a greedy and unregulated lending industry that is out of control and utterly disconnected from the financial realities and struggles of the everyday American.

Full post as published by Credit Slips on May 21, 2009 (boomark / email).