The spider to the fly

The US Treasury and Federal Reserve are giving over a trillion dollars to financial institutions. They also intend to invest and assume partial ownership in them as well. Yet, the only thing being promised the American taxpayer is easier credit. Is that a good thing?

Everyone, including my son, who happens to be a junior in college and unemployed, is being inundated by offers for credit cards. Most of my household mail consists of mailers from numerous financial institutions offering me credit cards. They promise low interest rates yet the fine print says that if you make one late payment, they can charge you a usurious 25-30 percent. Credit cards have become so easy to get, but so expensive to manage. The allure of credit cards is appropriately captured by this stanza from the poem Spider to the Fly by Mary Howitt, Will you walk into my parlour?” said the Spider to the Fly, ‘Tis the prettiest little parlour that ever you did spy.

Should we be concerned? In the New York Times article Some Debt Trends Are Good. This Isn’t One of Them, they reported AMERICAN credit card debt is growing at the fastest rate in years, a fact that may signal coming trouble for the banks that issue them. This week the Federal Reserve reported that the amount of revolving consumer credit that is outstanding hit $937.5 billion in November, when seasonally adjusted, up 7.4 percent from a year earlier.” Market Watch in their news piece, Another shoe to drop, says Credit-card debt is on the brink of imploding and will be the next storm to hit the fragile finance industry, an investment research firm predicted this week. The Washington DC think tank, Center for American Progress, believes so. In their report, House of Card, they state, As borrowing in the mortgage market slows, credit card borrowing is accelerating-a dangerous trend because borrowers still face weak income growth. That means the credit card market could eventually run into the same problems that now afflict the subprime mortgage market.

The Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth, in its report Pushing the Limit states, During the past few years, the United States has experienced an unprecedented boom in household debt. Although most household debt is in the form of mortgages and home equity lines, credit card debt deserves particular attention. The reason: credit card debt tends to carry high interest rates, large fees and a number of hidden costs, all of which weigh disproportionately on lower income families. They are also concerned about the mortgage refinancing of credit card date. In their report, Risking Homes to Pay Off Credit Cards, The fear of overwhelming credit card debt is driving many Americans to hand their equity back to mortgage lenders in the form of “cash-out”

What are the solutions? The Council on American Progress succinctly summarizes a variety of solutions: implement a credit card safety rating system that can give consumers better information about their credit cards and thus help them make better decisions; and Congress should mandate a higher level of fairness in credit card terms by adopting the Credit Cardholders’ Bill of Rights Act that also bans several of the most abusive credit card practices.

USA Today reports in its article a proposal would limit increases in credit card fees, and rates. The Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration are recommending a proposal that would:

  • Bar issuers from raising interest rates on existing debt, except under certain conditions, such as when a promotional rate expires or when a borrower pays 30 days or more late.
  • Prohibit issuers from calculating one month of finance charges based on two months’ worth of activity, a punitive practice called double-cycle billing.
  • Require card issuers to apply monthly payments that exceed the required minimum at least partly to higher-rate card debt. Borrowers often face varying interest rates on credit card debt, for cash advances, balances transferred and purchases.
  • Bar financial institutions from charging checking-account customers a fee for paying an overdraft – unless the customer has had the chance to opt out of this payment.
  • Bar financial institutions from charging checking-account customers a fee for paying an overdraft – unless the customer has had the chance to opt out of this payment.

“Do not accustom yourself to consider debt only as an inconvenience; you will find it a calamity.”

- Samuel Johnson

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One response to “The spider to the fly

  1. Thank you very much for your post. Absolutely excellent information and very useful for me. Great done and keep posted. Looking forward to reading more from you.

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