My Two Cents - "The Credit Trap"

7/20/2007

College kids committing suicide, families and lives ruined, homes foreclosed upon, phone hucksters relentlessly badgering wiped out consumers, and even more shysters selling what is too good to be true. Sound like Lifetime movie? Think again. This is what goes on in everyday America as reported in the shockumentary 'Maxed Out' which I had the opportunity to view this past week.

Since one cannot open the mailbox or turn on the television these days without hearing the word credit I thought I'd warm up the whopping stick and take a swing at perhaps the ugliest pinata of all time: credit abuse. As our society becomes more and more debt-based, it is IMPERATIVE for anyone even thinking about taking on debt to consider the possible ramifications in both the short and long run.

There are clearly two Americas in terms of credit. Each week I receive email anecdotes from readers telling me the latest tricks that are being used to ensure that such and such bank's credit offer at least gets read before being doomed to the shredder. These readers are generally those with little or no debt and no desire to take on any. They are what would commonly be referred to as prime borrowers. They are the bank's worst enemy because the bank doesn't make money on them. They use credit cards as 30-day interest free loans being sure to pay their balances in full each month well in advance of the due date. They use credit based on convenience, not reliance. Common sense would dictate that they would not be actively solicited by banks. However, these days it appears the banks will lend money to anyone with a heartbeat (the heartbeat is optional in some cases). Many of us have had to invest in heavy duty shredders to handle the excess postal invasion.

The second America is the group that banks love. These folks for whatever reason are unable to stay out of debt. Some make just the minimum payments, are often late and have perhaps a bankruptcy or two in their past. The documentary cited a gentleman who bought a weight-loss gimmick for '3 easy payments of just $29.99'. Until it was all said and done he paid over $700 for the gimmick when tallying interest charges, late fees etc. These are the people that banks and credit card companies make their money on. They are essentially an annuity for the credit company, making minimum payments ad infinitum. The structure of the interest rates, payments and fees is such that once one is sufficiently encumbered, unless their financial circumstances change drastically (such as winning the lottery), they will never get out from under that debt.

The subprime area of the home mortgage market has gotten much attention recently. However, there is another subprime area which should be receiving equal attention and is not. That is the subprime consumer credit market. Consumer credit delinquencies are increasing at a frightening pace and yet so is the amount of credit being extended. Generally speaking it is not the credit worthy folks that are doing the bulk of the borrowing. What gives here? Banks are getting burned on delinquencies yet they continue to extend more credit to the same folks? This is starting to have Medieval undertones or in postbellum America, those of sharecropping. I am not going to make sweeping generalizations about the types of folks who get caught in the credit trap. I am sure that a good portion of them are taking on all this debt to keep up an otherwise unaffordable lifestyle. I am just as certain that a significant portion of these folks are taking on the extra debt to keep bills paid and food on the table.

'Maxed Out' lays most of the blame at the feet of the credit companies for pushing debt on school-age kids, uneducated folks and those down on their luck. Being a believer in personal responsibility, I am torn on this issue. Surely people need to be held accountable for their own actions. However, when big business runs roughshod over folks who have few alternatives, that gets my ire up. So where does one draw the line?

The take home message of 'Maxed Out' is a simple one: Credit, used wisely, is a valuable financial tool. Credit, used unwisely, can be a financial weapon of mass destruction. I wouldn't look to the government for a solution to this growing problem. As the documentary so eloquently states, the US government has the largest credit card of all, and it is Maxed Out.

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.