President Obama’s promising to work on the next looming financial crisis – credit card debt. As Americans face the finanacial hardships from crisis ONE it appears we may have crisis TWO coming right up, which is unsustainable levels of consumer debt for people who are already starting to lose jobs. I don’t envy the president’s team in this era where they need to work to support the banking structure, get them profitable, and get them loaning money while at the same time reign in the excesses, poor regulation, profiteering, and illegal banking activity that got us here in the first place.
However quality solutions are often simple ones, and I think we could go a long way towards recovery and solvency by taking a lesson from the council of Nicea which sought to regulate interest rates in more reasonable ways than we do now (although I think we’d need to remove the religious discrimination parts of those rules). Usury in history. In simple terms let’s just end the outrageous top interest rates charged by the banks on their credit cards, which often top 25%. I’d have to say these usurous rates have never had much of an impact on me because I generally pay off my balances before I get charged any interest. Also, I used to take advantage of introductory rate schemes (where you pay a few percent until an unclear time limit after which you pay a huge percent). If you monitor the dates and rates closely these are often a very favorable short term loan. However if you make the mistake of doing this without resources to pay them back at the expiration of the introductory rate you’ll be hammered to pieces with rates often as high as 20% or more.
Note that the introductory rate offers seem to be worse than they used to be and more misleading due to extra fees and also note that a single month at 24% can wipe out the savings you’d enjoy from a full year at 2%. As a general rule I’d say it’s best to avoid the “special offer” interest deals and in my opinion the Government should be requiring the banks to disclose the real APR on these offers rather than the fake number which does not reflect the fees. If, for example, you pay a 3% fee to borrow 10,000 at “APR 3%” for a year your actual interest rate on this is 6%, often more than a home equity line which is also more likely to be tax deductible.
A big part of the solution is to cap interest rates at levels that are less likely to financially ruin people. This in turn will lead to more responsible lending by banks who can no longer count on bait and switch and fake APR games to beef up penalties and fees (which are about 25% of all bank revenues!). Free markets suggest we should not over-regulate, but I think even Adam Smith would have said that the free hand starts to break down when people’s bad luck or ignorance traps them into paying 30% interest. I think much of the current banking game is based on assumptions of a lot of defaulting, and this becomes self – fulfilling as the rates skyrocket for those not paying. You wind up with a more predatory style system where you are trying to build fees and interest rather than load responsibly.