The Philosophy Of Credit Cards

The banks and credit card companies are not in the business to do the right thing. They are in business to make profits. The social impact of giving almost all students and low income earners a credit card at a high interest rate with a high maximum limit is to create a class of people who are terminally indebted to the companies, paying the monthly minimum amount, or to use bankruptcy as the only way out of the revolving credit nightmare.

An example is in order. If you have an income of $25,000.00 and you have worked at the same company for 5 years, and you have a reasonably good credit history, you should generally be able (other factors do come into play) to get credit cards from the major credit card companies that will give you an available limit of approximately $7000.00 - $10,000.00. Your pay cheque on a monthly basis after taxes etc. is approximately $1600.00. If you were to max-out your credit cards your minimum payment per month (on interest of 18-20 per cent) will be $250.00 - $350.00. If you are to assume expenses of rent (low income earners rarely own houses), food, transportation and utilities are all at an average amount, you can see how a person will need to tighten his belt to pay the minimum each month. It will take him approximately 10 years to pay off the debt and he will have paid the credit card companies an estimated $30,000.00 - $40,000.00.

Now the credit card companies will more than likely deny that they lend low income people high amounts through credit cards in order to put them into a situation that will mean paying at the most the minimum amount each month (because anything higher would be to take away from things such as food purchases). They will also likely mention that everyone has free will and therefore have chosen to be in this situation. That argument does have merit. But we must not forget that lending companies know that as a group low income earners have certain behaviours in common (as do all economic groups), and that the manipulation of these behaviours can result in a lucrative revenue stream.

One of the most common of these behaviours is the willingness to pay a premium for the ability to get higher ticket items. A low income earner knows that the only way he can afford certain items (such as furniture, appliances, and electronics) is to arrange partial payments over time. Lay-away or rent-to-own arrangements are very popular options for low income earners. With rent to own stores, pawn shops, and payroll loans establishments on each block, poorer neighbourhoods are great areas for businesses selling high tag items either used or at a premium cost (after interest is included). Low income earners do not just wish to go to work, go home, go to sleep, and then go to work again. They wish to participate in leisure activities (watching T.V., listening to music, go to movies etc.) more so than any other income group. The jobs they work at are usually boring or labour intensive so the need for leisure as a release gives them some meaning to their life (or at least an available coping mechanism). A $500 television purchased at $2000 (after including interest) is preferable to having no television at all.

I started this article with the definitions of usury. At one time, the lending of money at any interest rate was considered a breach of the law. Over time interest was allowed but a ceiling on the amount was placed on all loans. At present, in Canada, it is a breach to the Criminal Code to lend money at a rate of higher the 60%. The worse lenders (department stores) have interest rates in the 30% range, so no lending establishment has approached what is known as loan-sharking. But what is offensive is the lending of money at a rate that allows anyone to put themselves into a situation where they are paying four or five times the amount of the original loan over a period of time. Too add to it credit cards give you the ability to never pay back the loan at all. You can with its use pay only the interest on the debt each month and take the debt to your grave.

The chart below shows the increase in personal bankruptcies in Canada from 1980-1998. It is not coincidental that credit cards were introduced on a mass scale during the same period. Credit cards are not the only reason for the increase but they do play an important role.

The credit card companies, if they are to behave in an ethical manner, should return to the days when credit cards were introduced to me and others in the ‘80s. A reasonable interest rate, with a maximum amount that is easily paid back even in dire circumstances, should be the modus operandi of all credit card companies. It is in the public interest for this to occur. Restricting this blanket-market approach of the credit card companies will reduce the number of bankruptcies in this great nation of ours and will leave a lot less students and low income earners having to bear the burden (emotionally and socially) of a bankruptcy on their credit history.