February 6, 2007 7:25 AM

There's a simple solution: don't buy stuff you can't afford

Lawmakers target rising credit penalties

Real financial heroes (video goodness)

WASHINGTON - Democratic lawmakers challenged credit card executives Thursday over rising late fees and other penalties and marketing practices they portrayed as predatory. The credit card industry and its practices came under scrutiny at a session of the Senate Banking Committee. Several Democratic members of the panel are proposing legislation to require companies to provide more details to consumers on how long it will take them to pay off their debts if they make minimum monthly payments, and to rein in solicitations of college students. Credit cards have become a ubiquitous and indispensable part of the culture, with an estimated 640 million cards in Americans’ wallets and more than $1.8 trillion charged on them in 2005. Many depend on them to pay their bills and buy groceries or gasoline. But consumer groups and other critics say fees are excessive and information provided to consumers is confusing.

I suppose the financial situation of a large number of American families should be taken as a measure of the marketing skills of credit card companies. They’ve convinced millions of Americans that the path to the Good Life is by borrowing money at 18-22% interest. Why wait when you can have what you dream of NOW? It seems the message has gotten out: delayed gratification is so mid-20th century.

Most Americans carry at least one card in their wallet. By now, it’s a perfectly natural part of American life. How many of us can recall when we got our first credit card? Didn’t it feel like you’d arrived, that what you held in your hand was an entree to adulthood? Now you could BUY STUFF (albeit at 18-22% interest) and not have to bother yourself with messy details (like “How am I going to pay for this?”). The day of reckoning was something that would come later, so why shouldn’t we be able to enjoy what we want in the here and now?

This is a subject of which I can speak with some expertise. Not only have I allowed myself to fall victim to the siren song of credit card companies, I used to work for one. Suffice it say that I’ve seen both ends of the horse, and sometimes I’m not certain there’s really much of difference.

The banking industry maintains that credit cards are an essential element of the economy, providing convenience to consumers - at flexible interest rates according to the risk of the holder. Industry officials have acknowledged that the disclosure material provided to consumers could be improved.

Yes, I suppose that credit cards do have their place. Even so, saying that disclosure material could be improved is like saying the war in Iraq could possibly have been planned a wee bit more competently. Of course, the burden is on consumers to educate themselves, but have you ever tried to read one of those things? A credit card disclosure statement should never be read prior to operating heavy machinery. You’re liable to wake up only to discover that you’ve knocked down the wrong building.

The executives defended their practices as fair and responsible. Most customers pay their bills on time, and only a small proportion of them represent a risk of default and are subject to punitive measures, they said.

This is true, but what most Americans don’t realize is that most credit companies build a loss factor into their budget projections. Depending on the type of clientele they cater to, a company will generally accept a 5-8% default rate as a cost of doing business. Anything that can collect of that 5-8% is a bonus. Credit card companies expect people to pay late or go over their credit limit; those fees are major revenue sources. Without them, many companies wouldn’t even be in business.

I’m not going to accuse the banking and credit card industry of predatory practices; I’ll leave you to draw your own conclusions on that one. Despite what their advertising tells you, though, using the right card is not an entree to the Good Life. No millionaire has ever said, “I owe it all to my credit card miles”. By and large, credit cards represent a spectacularly poor financial decision. Don’t believe me? Well, would you pay 18-22% for a mortgage? How about a car loan? No? That’s what you’re doing when you financed those Manolo Blahniks you just bought at Nordstrom using your VISA card.

I don’t say this to pass judgement on those who use credit cards. I’m simply sharing my viewpoint on the subject. Unfortunately, I’m one of those people who never learned how to handle money. My parents never taught me, publics schools never taught, and as a result I made some spectacularly poor (and stupid) financial decisions upon entering adulthood (I once bought two brand new cars at the same time…and it gets worse). In 1991, I filed for Chapter 7 bankruptcy…because I had no other option available. I was divorced, broke, and in WAY over my head.

After a few more fits and starts over the years, I’ve reached the point where I no longer even carry a credit card. I imagine I could qualify for several if I chose, but we’ve made the decision that the only way we’re going to achieve our financial goals is to embrace the reality that gratification delayed is not gratification denied. One of our cars is paid off, the other one is not far away, and the only other debt we have is the mortgage. Years ago, I’d never even conceived that one could live like this, and now I wouldn’t have it any other way.

When you get right down to it, there’s a very simple principle that we’ve decided to live by- DON’T BUY STUFF YOU CAN’T AFFORD. Sure, it’s not as “convenient” as whipping out the VISA card, but it’s a lot less stressful, and at this point in my life that counts for an awful lot.

We’ve learned a lot by listening to Dave Ramsey. While I wouldn’t describe myself as a rabid acolyte of Ramsey’s, I do agree with his core philosophy, and it’s made our financial life much less complicated and stressful. I’ve discovered that you can indeed live without credit cards…and- in our case, at least- it can be a smart financial decision.

So, while Congress is whining and moaning about the credit card industry, we’ve simply opted out. It sure beats paying 18-22% to avoid the agony of delayed gratification.

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This page contains a single entry by Jack Cluth published on February 6, 2007 7:25 AM.

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