Several weeks ago, I attended a meeting with the head of the credit card division of a large national bank. As previous written, in our social justice work, we are concerned that interest rates are destroying the ability of the middle class to enjoy the prosperity we all seek. Usury is religiously prohibited in Western Religious Traditions because it devastates working people’s ability to leverage their work into home and property.
While I didn’t expect the bank to accept an ethical rationale for a cap on credit card interest rates, I was surprised at how dysfunctional the system really is. In normal times, the cost of credit card business is around 14%: 3% for cost of funds, 2% operating costs, 2% marketing, 5% write-downs and around 2% for profit. Today with defaults closer to 10%, it would take and interest rate of 19% to make a 2% profit.
How can this work? … by charging rates of 25-30% for some customers. How can anyone dig out of this kind of credit card balance, when they’ve missed a few payments, and their rate is raised to 29.99%!
And yet looking at this model: it’s not the only model. Not every college kid has to receive offers for credit cards. I don’t know why I receive at least one credit card solicitation by mail every week. Maybe credit cards should not be offered to everyone? I remember my first credit cards in the late '70s and early '80s had rates of 7-8%. Banks still made money in those days with a different model of making a legitimate profit. Maybe in the coming months a different model for bank profit will find its way to the public domain.
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It seems that the era of freely-given out credit cards coincided with/engendered the growth of individuals becoming much less restrained with their buying habits - purchasing things they really didn't need or not truly recognizing what they were spending until the bill came due. I work on some bankruptcy reform issues and I know that 40% of all personal bankruptcies are due to unexpected and insanely huge medical care costs, which I am totally sympathetic about, and is the type of thing that credit cards for which should be used. At least during this current economic downturn, people are regaining a sense of thrift. If only they would return to synagogue to fill them spiritually with the kind of fulfillment they got with shopping.
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