Credit Cards Are Financial Heroin, Designed To Be A Debt-Addiction System
Credit Cards Have Changed Us From An “EARN-NOW, SPEND-LATER” Society Into A “SPEND-NOW, EARN-LATER” Society
A Fundamental Change In Human Behavior
People have this bad habit of thinking that things were always more or less the way they are now, that the fundamentals of human society really haven’t changed that much. But that’s not true.
Our society has changed in new, unique, and fundamental ways that never existed before in the history of the human race.
Addicted Customers Make Sellers A Lot More Money
Purdue Pharma spawned the opioid catastrophe for one and only one reason — to make a tremendous amount of money.
Banks designed America’s debt-addiction credit-card system for exactly the same reason — to acquire vastly greater wealth no matter what the cost to working and middle class families.
Oxy Fueled A Drug-Addiction Catastrophe & Credit Cards Have Created A Massive Debt-Addiction Epidemic.
Credit Cards Are Designed To Be A Debt-Addiction System
The strategy of making money by trapping purchasers in quicksand debt and perpetual interest existed before credit cards, but it was mostly limited to loan sharks and the share croppers and miners who relied on their employers’ company stores in order to survive.
Today’s credit-card system has allowed banks to become every consumer’s Company Store, trapping tens of millions of Americans in quicksand debt that can never be repaid and which the banks don’t want to ever be repaid.
Why Credit Cards Are A Debt-Addiction System
- Greatly reduce the friction of purchasing goods and services which, in turn, massively increases
- — impulse debt purchases of goods the consumer may not need, and
- — the debt purchase of larger quantities of goods and services for which the consumer cannot afford to pay
- Change the purchase equation from Earn First, Spend Second to Spend First, Earn Second
- Are the gateway to a frictionless, automatic debt system
- — with minimum monthly payments that are too small to ever repay the debt
- — where every month the borrower faces the risk of incurring a late fee
- — where months or years after the purchase the lender can increase the interest rate on the old existing balance
- — that can charge an unlimited rate of compounded-monthly interest
The History Of Spending
Throughout History Almost All Consumer Purchases Were With Cash
While some businesses did effect purchases with checks as far back as the 1700s, throughout all of human history prior to the general acceptance of the BankAmericard, the overwhelming majority of consumer purchases were made with physical money.
There’s a lot of friction in paying with cash.
Cash Encourages More Thoughtful Purchases
With cash, every time you want to buy something you have to dig into your pocket and hand over coins or bills, and when you run out of cash you can’t buy anything more.
That process makes you think seriously about what you’re buying, how much cash you still have in your pocket, what you will need to buy in the coming days or weeks, and whether you can actually afford to buy that particular item at all.
With cash, for every purchase people have to ask themselves, “How badly do I really need this?”
If you didn’t have sufficient cash in your pocket to make your purchase then you had to go to a bank and apply for a loan. The banker would then either demand collateral worth more than the amount of the loan or assure him/her self that you were going to be able to repay the money under a specific monthly payment schedule or in full by a specific date.
Not only did this process cost the consumer time and money (friction) but it also greatly limited how far into debt most people could go.
Through the 1950s and 1960s consumers who didn’t have enough cash to buy something usually obtained credit from the merchant selling the product.
If you wanted to buy a refrigerator or color TV, the appliance store would contact their partner finance company and ask, “Will you loan Bill Jones $400 to buy a color TV from me?”
The finance company would check Bill’s credit and then decide if he likely could afford to pay them back the $400 plus 15% interest with a monthly payment amortized over 36 months.
If it looked doubtful that Bill’s paycheck could stretch that far, then no color TV for him.
So, prior to the consumer getting a BankAmericard,
- The banks and finance companies would not allow you to get farther into debt than the bank thought you were likely to be able to get out of, and
- Other than the mortgage on your home, the debts you were able to take on were usually scheduled to be repaid in full within three years or less.
The pre-credit-card finance system had built-in checks and balances that kept most people from taking on more debt than they could likely repay over the next two or three years.
Moreover, the interest on that debt was generally in the range of 12% to 18% or less, compounded annually.
The Invention Of The General Purpose Credit Card
The first general purpose credit card was the BankAmericard created in 1958, but its usefulness was initially very limited. In 1966 B of A licensed the Bankamericard to other banks, thus allowing the system to expand nationwide. In 1970 the Bankamericard-licensed banks formed National BankAmericard.Inc which centralized the operation of the system. In 1976 the Bankamericard system was officially renamed VISA.
Why Credit Cards Are Unique In Human History
The BankAmericard changed consumer purchasing in several new and fundamental ways:
- The transactional friction was massively reduced, greatly increasing both the consumer’s number of purchases and the total amount of the debt they were able to easily incur
- There was no third-party determination if the consumer would ever be able to repay the debt
- The repayment of the debt was not tied to any specific time frame
- Interest rates increased from a maximum of 18% compounded annually to 24% or more compounded monthly
- The interest rate on the entire outstanding balance could be increased by the lender months or years after the purchase without the borrower’s consent
- The penalty for missing a payment was not calling in the entire debt or seizing the collateral but rather a fee that was added to the amount of the debt and which penalty charge would itself also bear high interest.
Minimum Payments Are DESIGNED To Be Too Low To Ever Repay The Debt
The brilliant, key component of this Debt-Addiction System was making the minimum payment amount too low to ever repay the debt, often too low to even pay the current interest on the debt.
The banks didn’t want their money back. They wanted the consumer to pay interest on their loans forever.
If I loan you $1,000 at 20% interest and you pay me $100/month, in less than a year the debt will be paid and I will have earned less than $200 in interest.
If I loan you $1,000 at 20% interest and you pay me a minimum payment of $16.67/month, five years from now you will still owe me $1,000 and I will have earned $1,000 in interest.
The minimum credit card payment amount is designed to keep the consumer in debt and paying interest forever.
Minimum Payment Examples
The minimum credit-card payment varies between 1% and 2% of your outstanding balance. If your card balance is $10,000, your bank’s minimum payment is 1%, and your card’s interest rate is 24%, at the end of one year you will have paid the bank $1,200 and your debt will have increased from $10,000 to at least $11,200.
If your bank’s minimum payment is 2% then after a year you will have paid the bank $2,400 and you will still owe the bank $10,000.
And if you make only minimum payments and each month you sink farther into debt the bank will often offer to raise your credit limit so that you can sink even deeper into their financial quicksand.
Nothing like this ubiquitous, automatic, never-ending, low-friction purchasing system has ever previously existed in human history.
The first late fee for failing to timely make that $200 minimum payment will be $29 and if within six months you’re late again it will be $40, and also the bank will likely increase your interest rate on the entire $10,000 balance to 30%, compounded monthly.
Even Less Friction
And banks and merchants are not done yet.
Amazon has famously promoted its almost completely frictionless stores where the consumer can take anything s/he wants off the shelves and just walk out the door with their credit card being invisibly charged in the background by the store’s computer system.
Now the consumer is incurring a debt without even being aware what’s happening, leastwise how much they’re being charged.
Impulse purchasing taken to the ultimate level.
Buy Now, Pay Later
The Buy-Now, Pay-Later finance companies are luring consumers with the promise of tapping a button and walking out with their purchase in exchange for their promise to make a set number of monthly payments at a set amount.
Of course, a huge number of purchasers will miss at least one of those payments, thus running up late fees and potentially incurring interest charges on the entire original amount, calculated from the date of the initial purchase.
Like the heroin dealer who gives the “customer” their first taste for free, the Buy Now, Pay Later lenders’ playbook is simple:
- Lure people into borrowing money by making it quick and easy for them to buy things they can’t afford and/or don’t need, and then hit them with interest and/or late fees when they eventually realize that they don’t have enough money to timely make all the payments they’ve agreed to.
A Partial Fix?
Suppose Congress required the minimum monthly payment to be between 200% and 300% of one month’s interest on the new outstanding balance? If set at 250% that would mean that if you only made the minimum payments the entire debt would be paid off in about 3 1/3rd years.
Suppose before you authorized a new charge the bank was required to tell you how much that proposed purchase would increase your monthly minimum payment?
For example, let’s say that your balance was $9,000 and your interest rate was 20%. You’ve decided that you just have to spend a $1,000 to buy a used jet ski so that you can zip across the lake this summer. You tap the card and the screen says:
Your current minimum monthly payment is $375.
With this purchase your new balance will be $10,000 and
your new monthly minimum payment will increase
by $41.67 to $416.67.Authorize This Purchase ----- Cancel
- What if late fees were capped at the lesser of (1) 10% of the missed minimum payment and (2) $40?
- What if interest rates were capped at the lesser of five or six times the prime interest rate and 29%?
- What if any changes to your interest rate only applied to new purchases incurred after the date that the interest rate changed and that the old interest rate would continue to apply to the balance that had accrued prior to the change in your interest rate?
- Payments would first be applied to interest accrued at the higher rate, then interest accrued at the lower rate, then to purchases subject to the higher interest rate and finally to purchases subject to the lower interest rate.
- In addition to the overall card limit, set a limit on the amount the consumer can charge in any three month period to some percentage (25% to 50%) of the card limit. This would prevent the consumer from going on a spending spree and would encourage card usage for the normal expenses of living and deter purchases of big-ticket items at the high credit-card interest rates.
It’s a start.