The bankruptcy bill currently before Congress is going to make it harder for people to erase their debts. The legislative measure has been pushed by the credit card industry for some time now to reduce what they say are excessive numbers of people seeking to avoid having to repay their debts.
Here’s an idea – how about not extending such easy credit in the first place? The whole reason people have to apply for loans is to determine their creditworthiness, their ability to pay back a loan. If credit card companies didn’t issue loans to people who couldn’t repay them to begin with, bankruptcies wouldn’t be such a problem.
You’ve seen the free tee-shirt and pizza offers from people manning tables around campus – those are the people who offer to give you something free in return for filling out a credit card application from Citibank, Chase Manhattan, Bank of America, or some other well-known financial institution. Why would such important banks be interested in no-name college slobs like us?
It’s because we’re a primary source of their profit. They know that college students are away from their parents for the first time, have a high appetite for ordering pizza (and other food we don’t have to cook ourselves), and we usually don’t understand the rules of credit.
This is a recipe for high credit card debt, and because most of us have low-paying or no jobs, we have no way to pay it back unless we have rich parents to bail us out.
Credit card companies are saying that it’s our fault for being so much in debt, but these companies wouldn’t even exist if it weren’t for the repeal of certain laws around 20 years ago that used to protect consumers from these kinds of traps.
Only 20 years ago, credit card companies didn’t do very much business because usury laws across the country prevented such predatory lending practices, making sure that people weren’t taken advantage of by the prospect of easy money.
But then one state, South Dakota, repealed its usury laws, ushering in a new era of credit card lending when Citibank moved its credit card department there. Other banks soon followed, and Delaware, now another financial center, repealed its usury laws as well.
Now, with such easy credit, credit card companies are free to trap people into paying ever-increasing interest and late fees on debt they can’t afford to repay. Most credit cards don’t even charge an annual fee anymore because they make so much money off of interest payments alone. Before the repeal of usury laws, annual fees were virtually the only way credit card companies made money.
We could be smarter consumers – we could spend only what we actually have in our checking account. We could pay our bills in full every month, and credit card companies that didn’t charge an annual fee wouldn’t make a dime from us.
But we are a consumer society, so when we are given an extra ability to consume, such as a credit card with a high limit and low introductory interest rate, we usually take it without thinking that the interest rate will eventually go up.
Credit card companies know this – they make no effort to educate consumers about this when they apply for their cards, instead hiding this and other dangers of having a credit card in small-print legalese that no one ever bothers to read anyway. No wonder, then, that over the past decade bankruptcies have risen to record levels every year.
Credit card companies say the reason why they are seeking to make it harder to declare bankruptcy is to curtail abuse of the bankruptcy system. But if there is abuse here, it isn’t by the people declaring bankruptcy; it’s by the credit card companies themsleves who engage in such misleading and predatory practices.
Instead of making it harder to declare bankruptcy and potentially shutting people out of the system who really need it, credit card companies should work on curtailing their easy credit practices – making sure credit limits reflect consumers’ actual ability to pay by denying credit to those who don’t deserve it – and educating consumers on the front end without the fine print.
And the next time you see somone on campus offering you a free gift for filling out that credit card application, you might want to think twice before signing your name on that dotted line.
Omar Yacoubi may be reached at yacoubioa@vcu.edu.