Tuesday, July 19, 2005

Right Idea, Wrong Solution 

The Federal Government has urged credit card companies to find ways to help their customers pay off their balances faster, which is a good thing. But, since the Federal Government is in the back pocket of the credit card industry, the "solution" is exactly backwards...
Within the next month, Bank of America, MBNA and Citigroup will raise minimum monthly payments on their cards from 2 percent of the balance to up to 4 percent, not including interest. Other card issuers are expected to make similar changes by the end of the year.
Or, in other words, the minimum monthly payment due is about to double for some credit card holders.

Now, in some strange looking-glass world, this gets translated into, "Look! Consumers can now pay off their balances in twenty-four months instead of forty-eight." In reality:
  1. Paying only the minimum amount due on a credit card balance, you will never pay off the balance. Okay, you might manage it in fifty twenty-five years... that's comparable to mortgage terms. A typical car loan is only five years.
  2. Obvious to anyone not working for the government: doubling the minimum monthly payment ups the chances that more of the card company's customers will miss a payment, so the credit card company can rake in even more of those sweet, sweet late fees -- making the entire exercise moot, anyway.
Again, the solution is simple, at least from a logical viewpoint. Never accuse the bribed of being logical though.

Here it is: the government has got to put a cap on credit card interest rates. Period. On what planet is an 18-20% (or higher) interest rate not usury? Ten percent would be a tidy profit; five percent would be more in line with other loan rates. This would have a double effect: first, credit card balances would not run away at insane, compounding rates, keeping them more manageable for borrowers. Second, credit card companies would suddenly get a lot more responsible about granting credit, since the insane profit margin would be reduced to something more in line with other businesses.

On top of that, it might be a good idea to regulate credit card advertising. Hey, we try to protect children from alcohol and tobacco advertising, right? Should be the same with credit cards, so they aren't getting the message from the cradle to young adulthood that Plastic Gets You Everything.
Interest charged on paying cash: Zero.

Cost of financial responsibility: Zero.

Being debt-free: Priceless.

For everyone else, there's Mastercard...

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