What to Do About the Debt Trap | The Agonist
It used to be that the debt habit, rather like the smoking habit, started in college when students were offered their first free credit card; now grade school children are being enticed into the borrowing habit. The universal FICO score used to assess a consumer's creditworthiness actually penalizes people who do not borrow at least some amount of money.
Today, banks compete for customers aggressively, people switch accounts chasing the higest interest rates or lowest fees, and as a result branch staff don't know their customers. Computer models are used to assess creditworthiness and people shop for credit as well. As a result, a branch manager is little more than a glorified computer operator - he has no discretion to grant you credit.
Credit is based on information from the credit reporting agencies, and the credit reporting agencies have determined that no credit history is worse than bad credit history. This means that no matter how much evidence a branch has that you carry a balance on your accounts and live below your means they can't give you credit if you don't have a credit history. Because the key criterion of creditworthiness has become not any objective solvency but a history of making credit repayments on time.
And, so, knowing the importance of having good credit and that to have good credit you have to borrow, responsible adults encourage their wards to borrow and repay even if they could just pay without borrowing, to "establish a good credit history".
It is perverse, but it is not conspiratorial. It is just a consequence of the way modern business principles have shaped retail banking. The brainless should not be in banking. — Willem Buiter
These days, a "deadbeat" is someone who pays all of their bills on time, never borrows, and therefore deprives the banking industry of interest income. To get even with these people, and to disguise the usurious interest rates being charged, banks have invented a host of "fees" that penalize consumers for the slightest failure to meet the tiny print rules associated with their credit card, auto, mortgage, or home equity loans. These rules no longer allow a three or four week period to pay your monthly bill; now the bill is due in two weeks or less. Often it is due on a Saturday or Sunday, causing a late payment fee of $30 or higher. The large banks derive over half of their net income these days from fees, not from interest revenue. The business of generating fees - and it is a business - has gotten nearly diabolical. It used to be that your checking account would record your debits and credits in the order in which they were received, and checks drawn on other banks could take two or three days to be processed through the clearing house. Since most checking accounts now have debit or ATM cards attached, big banks have deliberately changed these rules. Now all of your debits are processed instantly, the largest going first. Your credits - even if you transfer money from an account within the same bank - are delayed at least a day. The diabolical aspect of these changes is that the process almost assures a consumer will have a negative balance at some point. But rather than reject the next debit at the retail outlet or gas pump, the banks allow it to go through, creating a deliberate overdraft. Conveniently - for the banks - the checking account has had attached to it an overdraft borrowing account that was never asked for by the consumer, and cannot be opted out. It just shows up one day buried in the fine print updates that banks send out frequently and which are impossible to read or understand.
These days, a "deadbeat" is someone who pays all of their bills on time, never borrows, and therefore deprives the banking industry of interest income. To get even with these people, and to disguise the usurious interest rates being charged, banks have invented a host of "fees" that penalize consumers for the slightest failure to meet the tiny print rules associated with their credit card, auto, mortgage, or home equity loans. These rules no longer allow a three or four week period to pay your monthly bill; now the bill is due in two weeks or less. Often it is due on a Saturday or Sunday, causing a late payment fee of $30 or higher.
The large banks derive over half of their net income these days from fees, not from interest revenue. The business of generating fees - and it is a business - has gotten nearly diabolical. It used to be that your checking account would record your debits and credits in the order in which they were received, and checks drawn on other banks could take two or three days to be processed through the clearing house. Since most checking accounts now have debit or ATM cards attached, big banks have deliberately changed these rules. Now all of your debits are processed instantly, the largest going first. Your credits - even if you transfer money from an account within the same bank - are delayed at least a day.
The diabolical aspect of these changes is that the process almost assures a consumer will have a negative balance at some point. But rather than reject the next debit at the retail outlet or gas pump, the banks allow it to go through, creating a deliberate overdraft. Conveniently - for the banks - the checking account has had attached to it an overdraft borrowing account that was never asked for by the consumer, and cannot be opted out. It just shows up one day buried in the fine print updates that banks send out frequently and which are impossible to read or understand.
deadbeats 'These days, a "deadbeat" is someone who pays all of their bills on time, never borrows, and therefore deprives the banking industry of interest income.' in our economy/society, nothing galled me more than being unable to get credit simply for the lack of credit history despite an otherwise good financial history and circumstance -while someone else with a poor history and circumstance actually can. it's crazy. (or a saving grace, like 'hey, you've been careful so far, far be it from us to enable your indebtness'. i say that tongue-in-cheek, of course, but truthfully, i always had shied away from credit out of what i thought was wisdom.) Zuma June 11, 2009 - 10:23am
'These days, a "deadbeat" is someone who pays all of their bills on time, never borrows, and therefore deprives the banking industry of interest income.'
in our economy/society, nothing galled me more than being unable to get credit simply for the lack of credit history despite an otherwise good financial history and circumstance -while someone else with a poor history and circumstance actually can. it's crazy. (or a saving grace, like 'hey, you've been careful so far, far be it from us to enable your indebtness'. i say that tongue-in-cheek, of course, but truthfully, i always had shied away from credit out of what i thought was wisdom.) Zuma June 11, 2009 - 10:23am
After my first year, however, unsolicited credit card offers started piling up in my mail and it never slowed down... Europeans think a hundred miles is a long way. Americans think a hundred years is a long time.
