Tuesday, October 28, 2008

Are credit cards the next collapse?

From McClatchy via the Huffington Post news wire:

As the economy slows and unemployment rises, consumers are defaulting on credit-card payments more often. And though that trend is unlikely to create a crisis in line with the mortgage fallout, it's still a headache for banks that are already hurting.


To be sure, credit cards don't represent a huge portion of assets for most banks. For example, they comprise about 14 percent of all consumer loans and leases at Bank of America, the country's largest credit-card issuer. The main problem, Nishikawa said, is that "everyone is so weak after what happened with mortgages that another blow to a consumer product would be hard to handle."

Consumer groups have long complained that credit-card issuers push cards onto people who don't need them or can't afford them. They say that rising credit-card defaults – just like mortgage defaults – are largely the fault of banks who lent to risky borrowers.

Innovest estimates that about 30 percent of Bank of America's credit card loans are to subprime borrowers – second only to the failed Washington Mutual Inc., which had almost half of its credit-card loans held by subprime borrowers.

Innovest also estimates that more than half of Bank of America's credit cards are high-limit cards – second only to American Express Co. (Innovest classifies high-limit cards as those with lines of more than $10,000.) Nishikawa says that combination could prove toxic for Bank of America, which may have "lent more than (borrowers) can be expected to pay back."

More here.

Ha! Good, serves those motherfuckers right. That's what they fucking get.

Long ago, during my first few years away from home at college, I noticed that many of my friends were getting pounded with multiple offers for new credit cards. Me too. I thought it strange that kids with no income of their own could possibly be considered a good credit risk. As some of those friends began running up thousands of dollars in credit card debt, I decided that my credit-flush pals were being extraordinarily irresponsible, and that I would go as long as I could without getting one for myself.

To this day, I shun credit cards, using only a debit card when I've got to have plastic for whatever reasons. I was right, back then, in thinking that running up credit card debt is irresponsible, but I only had one tiny piece of the picture: banks issuing credit cards wanted irresponsible people to run up massive debt, and purposely targeted some of the most vulnerable and irresponsible people around, the young. Seriously. The human brain isn't fully mature until sometime in the mid twenties, and part of that immaturity is an inability to fully assess risk. Teens and early twentysomethings are simply incapable of seeing long term consequences in the way that fully developed adults can. Banks have also purposely targeted people in poverty, and people on the verge of poverty, for different reasons amounting to the same thing--the poor find it difficult to avoid credit card debt when they lack money to buy food or pay the bills or pay for health care; they're vulnerable, too.

All of this predatory lending, because that's what it is, came about when banks in the early 80s decided that they could make much more money from credit cards if they could get card holders to run a balance from month to month. It's all about the interest. Back in the day, credit cards were simply a service, making a small profit, and people who didn't pay up at the end of the month were usually cut off. People who didn't have much income couldn't get them in the first place. But when these banking corporations set up shop in the few states allowing usurious interest rates all that went out the window. The credit card industry became all about dicking people over, and turning them into life long sources of cash for the already rich.

And Washington, both Democrats and Republicans, were more than happy to allow it all to happen. Fuck man, they even helped out as much as they could: the bankruptcy reform law passed a few years back was all about keeping people deep in credit card debt from defaulting, a sort of fuck you to the beleaguered consumer.

Well, you reap what you sow. Wah, wah, wah. The credit card companies are hurting. Well, too fucking bad. That's what they get.

Watch Frontline's documentary The Secret History of the Credit Card here.