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Tuesday, July 26, 2005

Debt Nanny

Can someone tell me why the government, under the "we trust you with your own money" Bush administration no less, is pressuring the credit card companies to double their minimum payments from 2% to 4% (with interest) for the stated purpose that people need to be forced to pay off their credit cards sooner?

Where does the government sponsored MNBA tough-love end? The bankruptcy bill wasn't enough, apparently. They now want to drive people who are struggling in a weak labor market into bankruptcy by abruptly doubling their monthly credit card bills. I guess there's no use wasting time in getting people into their properly indentured forever status.

Seriously, I can understand why the credit card companies want to do this now that they are protected from people having their debts discharged when they suddenly can't make their monthly payments. But on what basis does a Republican government excuse its meddling into the private financial affairs of American citizens?

This sounds like a good campaign issue to me. It hits home --- it's like Gray Davis doubling the car tax in California; it's an increase everybody notices. If the Bush administration is actually pushing it, the Democrats ought to staple this little GOP corporate collusion right on the foreheads of Republicans everywhere in the '06 election.

Update: Apparently a lot of progressives think that this is a good idea. The government should be in the business of forcing people to save more money, lower their credit card debt faster and behave more responsibly.

Unfortunately, the problem is that a large number of people who are paying only their minimums right now are people who just can't afford to pay any more. And while it's always nice to assume that people who get themselves into debt are all bums who aren't smart enough or don't care enough to manage their money properly, we actually have no idea why individuals have such high debt --- but the statistics show that good many of them are people who suffered a protracted job loss, a health crisis or a divorce. Some of them are juggling high debt because they are changing careers, they started a business or they took some other entrepreneurial chance. The large numbers of good people in a temporary jam are, sadly, going to get lumped in with all the people we feel need to be taught a lesson.

This piss poor labor economy has been propped up by easy credit for a long time by people who wanted to keep the party going. Individuals who have not been getting raises or who can't change jobs because of employer based health care have had to manage inflation and necessary big ticket items with credit at ever higher interest rates. They've met their obligations, but apparently that's not good enough. Now, the government needs to raise the national savings rate because the government itself is spending like drunken sailors so they are going to put the onus on people who are living under the high stress of a stagnant job market and high debt to do it. Somehow that just doesn't seem right to me.

The credit card companies get "hurt" by a slight dip in their usurious profits and the individual working stiff gets to learn a lesson in not eating.

This is a suckers issue for Democrats. Telling working people that we think the government should encourage their credit card companies to raise their payments because they need to learn how to manage their money is something even I find offensive --- and I'm a liberal Democrat. Let the credit card companies eat it for a while by telling them to tighten their new credit requirements --- don't just suddenly lower the boom on people. Make all new debt subject to the higher minimums. But if people are carrying a heavy load like 300 dollars a months in minimums which they can just manage --- doubling it to 600(+ interest) one month is enough to put them on the spiral of late payments, 30% interest and financial doom. Real live people are going to be hurt quite badly if this happens.

I hate MBNA as much as any person but "sticking it to 'em" by pressuring them to abruptly raise the payments of their customers isn't really a winning way to deal with this, in my book.

Here is another article that explains what's happening in greater detail.

And another.

And another.

In every single article it discusses the long term good of people paying down their debt faster. And they also discuss the singular hell that people are going to be facing when this abruptly happens to them and they don't have the ability to come up with the cash.

I'm sure there are a lot of people whohave just been too dumb to realize that they should pay more than the minimums each month in order to keep up with the compounding interest on their debt. This may help them. But it's also quite obvious that alot of people are going to be thrown to the wolves on this:

Of course, if your finances are already squeezed to the breaking point, the rate hike is a bitter pill to swallow -- good for you in the long run, but hard to take right now.

"If you're living paycheck to paycheck and your minimum payment goes from $200 to $275, spread over five cards, that's an extra $375 a month," says Brauer. "A lot of families can't come up with that." The banks already know that and are planning for it. Bank of America, one of the first to raise minimum payment requirements, worked an extra $130 million into its 2005 budget to cover projected losses from defaulting cardholders.

The same defaulting cardholders who are now going to have to pay much higher fees to go bankrupt and who, if they make above the median in their state, will no longer be allowed to file chapter 7. Quite the double whammy.