On the heels of yesterday's post about loose credit as a substitute for increases in real income, I'm going to devote today to another fun credit-related topic.
So I'm guessing most of you have a credit card. Those of you who are particularly astute might know the APR on said card. In today's English it should be in the neighborhood of 18% for a "benefits" card (something offering frequent flyer miles, cash rebates, etc) and less for a no-fee, no-benefits deal.
The small percentage of you who actually read the "Terms and Conditions" pamphlet that accompanied your card know that there is also a "Default APR." Regardless of how large or small your card's standard APR happens to be, the Default APR is astronomical – something like 35%. I'm sure you don't worry about the Default rate, because it only applies to people whose accounts go into default. To do so requires several consecutive months (usually 2 or 3) without making payment. But you're conscientious, so that would never happen to you.
Now raise your hand if you've ever heard the phrase "Universal Default." Anyone? Well, let Uncle Ed tell you a story. Universal Default is a provision in your credit card terms which allows the lender to set your account to the default APR if you go into default on any loan to which you are a party. For example, you have a credit card from Citibank. Your account is in good standing. You fail to make several car payments, putting your auto loan (from a different bank) in default. Citibank jacks up your rate to 35%. Pretty simple, no?
In my old line of work (medical collections), Universal Default struck me as just about the most unethical, disgusting practice on the face of the Earth. Case after case looked the same. John Doe has no health insurance. John Doe gets in an accident and runs up a $15,000 hospital bill. He defaults on the hospital bill because, lo and behold, he doesn't have $15,000 lying around. Credit card companies respond by breaking it off in his ass. That's perhaps the worst part about UD – it can happen really, really quickly and it exists solely to take people who are drowning in debt and dunk them under the water until the bubbles stop rising.
And you wonder why it's now possible to trade bankruptcy futures.
Our lending industry reminds me of one of those carnivorous pitcher plants. The fly lands on the edge, sticks one foot on the inside, and finds itself irreversably sliding into the acid bath that lies beyond the sweet-smelling lures. Most people who end up getting crushed by debt aren't the caricature portrayed in the media – infantile people going on wild mall spending sprees. Instead, they're people with decent credit, stagnant wages, and an unhealthy reliance on short-term lending to maintain the facade of a middle-class lifestyle. They live on the brink, and if one small thing goes wrong – divorce, layoff, reduced income, medical bill, etc – the credit industry responds with both barrels.
We're a society floating on an ocean of debt, which is to say a society controlled by fear. Sure, we could let real wages grow, but it's so much better to let people charge it and live in fear of falling behind on their minimum payments. Boy, it's amazing how little workers complain about holding two jobs, unsafe working conditions, low salaries, outsourcing, layoffs, and nonexistent benefits when they're desperate and terrified! And sure, we could have free public college education in this country. But without mountains of student loan debt, however will we scare the newest members of the workforce into subservience? What a neat system….pay them little enough to make them borrow enough to keep them in constant fear of falling into the pitcher.
Sweet.
john says:
Hey Ed, I like your gusto, and I agree that fear is a great motivator for keeping the economy chugging. On a related topic, I wonder if you might let us in on your thoughts about the recent devaluation of the dollar? I have tried and tried to do internet research on the topic but I cannot find any information on it. My guess (and I might guess yours) is that it is a active plot to increase american output at the expense of the people who can't afford to invest in the euro. Or maybe it is just a passive effect of spending all our money in iraq.
Either way prices are going up and wages are staying low. But I can't figure out why! Any help?
Matthew says:
Is it ridiculously depressing in here, or is it just you?
No, I guess it's not just you.
Can I put in a request for kicking some republicans who are down, please? I mean, Paul Gillmor died and Tony Snow has colon cancer and no retirement money saved up. There ought to be something funny in there, right?
Ray says:
Universal Default is one of my favorite things to hate. I don't think there has ever been anything better designed to kick a guy while he's down. I got hit by the UD clause once – but not even because I defaulted. VISA did a "periodic review" of my credit to make sure I was still worthy of using their cards, saw negative information on a credit report from someone with my same name, and immediately applied the universal default clause to all my accounts — at Christmas. It took me months to clear it up.
Mike says:
John Edwards, from Businessweek:
==
As President, what would you do to help middle-class Americans reduce credit- card debt and help lower-income people avoid getting trapped by predatory credit-card lenders?
What we're going to do is restore balance in the credit-card market. I am proposing a Borrower's Security Act that would do the following: first, require credit-card companies to disclose the true cost of making only minimum payments, as many consumers do. Second, I would restore a 10-day grace period before imposing late fees and penalty rates. Third, apply interest-rate increases to future balances only. And fourth, end the practice of universal default, where a creditor can change a borrower's terms based on their debt payments to other creditors. We also need a new consumer protection commission, which I would call the Family Savings & Credit Commission, whose job it'll be to review all the financial services products that are being marketed to families and ensure that the terms are reasonable and fairly disclosed. [The commission would] oversee all types of financial institutions whether chartered under federal or state law.
==
Compare that to Hillary's 180 on the bankruptcy bills the moment she became NY's Senator and the commerical bankers showed up to bankroll her……
Ed says:
My problem with Edwards' response is that the terms of credit already are disclosed quite clearly. Payday loan places don't exactly hide the fact that they're charging obscene interest rates. Credit cards print your rate on the top of every bill every month. And not to sound like a right-winger, but I'm not sure it's the government or industry's job to point out that making minimum payments on a credit card is a really, really bad idea. There are free online tools and, you know, calculators. Both can tell you that. If one lacks the math skills to figure that out, well….that's another issue altogether.
I don't think disclosure is going to do much to stem the tide of people who have no other choice from taking loans at disadvantageous rates.
Chris says:
Stuff like this just makes me appreciate the end of Fight Club even more.