Excessive Lending - Article 009

Lending Excess - America’s Credit Card Crisis:

April 23, 2009 8:43 p.m. PST

America is the land of the free and home of the shoppers. In the past days of loose credit in this country, consumerism was a leading pastime for too many. Today people are feeling the pain of past excess. They are not alone.

Congress and the Obama Administration have turned their focus on the companies that issue credit cards. Sen. Chris Dodd (D-CT), Chairman of the Senate Banking Committee said, "I would like to put the credit card industry, issuing banks and card associations on notice. If you currently engage in any business practice that you would be ashamed to discuss before this committee, I would strongly encourage you to cease and desist that practice." Consumeraffairs.com.

At the House Financial Services committee meeting, held on April 16, 2008, there was wide-spread concern about credit card issuer’s business practices. In one of the more candid comments, an executive acknowledged the abuses. John Carey, the Chief Administrative Officer and Executive Vice President of Citigroup Inc.'s (C, Fortune 500) credit card division, admitted that some industry practices had gotten out of hand. "I do believe there are certain practices that are so outrageous and so unfair they should be stopped," said Carey. money.cnn.com/.

The public is outraged at financial service companies’ business practices over the past several years. Excess and greed fueled the majority of problems we face today. Huge corporate profits were ostensibly the primary objective in the creation of financial products. These profits eventually led to inconceivable compensation for industry top executives. The failing economy ultimately exposed the rogue financial service companies and their business practices.

Credit card issuers, once nestled in the background, now are coming to the forefront. It is not uncommon for a company to issue cards to people that are unable to pay off their debt. One example, are unemployed college students that are routinely issued cards. The average undergraduate has $2,200 in credit card debt according to Nellie Mae, the nation's largest provider of student loans. That figure jumps to $5,800 for graduate students. Since so many student credit cards have high annual percentage rates, “the longer these youngsters wait to pay the cards off, the worse it gets,” says Gerri Detweiler, Education Adviser for Debt Counselors of America.

Detweiler points out that by sticking to minimum payments, it would take a student more than 12 years and $1,115 in interest, to pay off a $1,000 balance on a card with an 18 percent annual rate. If students fall behind in their payments, they get slammed with high late fees. “It's easy for things to get out of hand.” This type of abuse happens in other areas as well, including: the poor, minorities, elderly and generally those least fortunate. Companies make huge profits by lending to groups of people that fall into debt and stay there. The entire credit card business could be called predatory.

It is difficult or impossible to understand the countless, potential fees, buried in credit company disclosure. Years ago, prior to signing a credit agreement, an individual would review a one page disclosure. Today that same document may be as long as 25 pages. Language in a contract should not be lengthy or complicated. What is needed is clear and fair disclosure. There should be education on the dangers of getting into debt and the problems associated with long payback periods.

The credit card issuers are not the only ones at fault. Many must look in the mirror. If America is going to come out of this recession, we must come to grips with some unhealthy habits. The idea that we must buy things to be happy is a real problem. We must make significant changes and deal with the fact that we must spend less then we earn; we need to get a handle on our expenses. We must realize that some of the greatest joys in life are free, like a good book from the library, a walk in the park and conversation with a loved one, etc. Ultimately, once our country handles its’ finances more responsibly, we will be on the road to recovery. We need to return to values of a prior generation. When we get there, America’s people will lead more satisfying lives.

In the meantime we should pay attention to the debate going on in Congress today. Greedy companies need to change their practices. We should not do business with organizations that do not have a concern about our welfare. It might be best to use only one card with a responsible organization, such as a small bank or credit union. Consumer Reports.

Today credit cards are a part of life, without one you are truly hindered. Use your card wisely. Analyze the companies you do business with. Make a conscious choice to work with organizations that have clear disclosure and good moral ethics. Educate your loved one about the dangers associated with credit cards and living beyond ones means.

Troy Daum, CFP®

www.wealthanalytics.com