Who is to blame for the recent crash of the credit card industry: issuers or consumers Numerous citizens think that credit card companies have greedy loan customs whose intent is to provide loans to unstable consumers. Others citizens think that consumers should be able to handle their purchases in a competent way. And others believe that the issue stems from both customers and credit card issuers. That each side of the debate generates a responsibility to be reasonable, lenders in their lending and consumers in their spending. This paper will examine a short history of credit cards, look at bank lending practices, consider consumer responsibility, and we will discuss the current CARD Act that the government issued to solve some of the current financial problems as well as some other recommended resolutions to the economys current crisis. Credit card companies focus on making a profit in order to benefit society as a whole. The problem lies within their lending practices and offering credit to risky consumers, which they make the most money from, but in the end it hurts their business and the economy when these risky consumers can not afford to pay their bills. The issue of lending practices needs to be resolved in order to stabilize the economy and build a trusting relationship between lenders and consumers that will continue to benefit society. The fact that the credit card industry crashed because of lending practices and consumers irresponsibility is an issue that needs addressed for the economic system of the United States to be able to turn around into a positive direction and continue to grow.
The credit card industry directly effects the financial system of the United States, and the worldwide economy. We are an entrepreneurial nation that allows our people the right to become prosperous in order to advance our nation together. Credit card companies make millions of dollars in profits every year, except if they choose to lend to risky consumers, this then leads to many issues for our financial system. Since our financial industry has went drastically downhill, consumers are spending less which has a negative impact on our economy. This, combined with lenders not giving credit to worthy applicants, is making the state of our economy worse and needs to be addressed to turn things around into a positive direction. With lenders denying credit to worthy applicants and consumers tightening their spending habits both are working towards destroying our economy as we know it. Trust needs to be established between credit companies and consumers in order to bring about a mutual respect that will enhance spending and proper lending to advance our current economy. How can they trust companies that helped them into financial ruin
Credit card use became frequent after WWII when Americans began to idealize using credit instead of cash to pay for purchases. The Diners Club credit card, created by Frank McNamara, was the first credit card that began shaping our economy, followed by Visa and American Express in 1958, and MasterCard in 1967, and Discover in 1986. According to an article titled “Credit Card”, Americans have a projected debt of $1.1 trillion in 2010 (“Credit Card,” 2010). This number portrays a false picture of the economy because with all of the Americans using credit to pay for daily living expenses, many have trouble paying them at the end of the month. Looking at the high unemployment rate, it comes as no shock that families are using their credit cards to pay for their utilities, mortgage payments, and grocery purchases. It is also possible that many consumers received their credit cards before times became hard and they have no choice but to use them to pay their bills. Why then do credit card companies issue so much credit to so many people The answer: predatory lending practices versus consumer responsibility.
Do credit card companies offer Americans an opportunity to purchase items they usually could not afford or do they help bury them in debt According to Dickerson (2008), “just about anyone or anything can get a credit card” (p.138). He states that consumers do not fully comprehend their contracts with lenders because the contracts change frequently and the average person does not have the ability to decipher the legal jargon that is disclosed. He also believes that credit card companies target individuals that will profit them the most, which consists of high risk consumers that carry long-term balances such as: college students, elderly, poor, and even individuals that have lost their house because companies believe they need credit cards because they can no longer borrow from their homes equity. Dickerson also believes that consumers, since they do not understand their credit terminology, charge because they have the ability to do so, without considering the upcoming penalties and difficulties associated with paying the money back. He believes that consumers should manage their money utilizing self control. According to Dickerson (2008), he is hesitant regarding the issue of the U.S. government bailing out companies in financial crisis, but believes the steps the government is currently taking are not going to be effective is solving the problem. He suggests that neither side should bear the brunt of the current financial situation, but officials should study lender behaviors. He does not believe that policies that increase the amount of information provided to consumers or enacting further consumer counseling will solve the issues alone. He recommends a solution that will benefit both lenders and consumers such as lenders treating consumers fairly and not taking advantage of risky or financially struggling individuals while still offering some sort of credit even if it is only a small amount (Dickerson, 2008, p. 138-60). The government has been bailing out mortgage companies for a few years now and it has not done much except make our financial crises a larger problem. People were getting such great interest rates on their mortgages (lenders were overstating home values and understating peoples ability to pay for them) a few years ago, so they would take home equity loans out in order to pay off their high rate credit cards. When the mortgage interest rates went up many homes were foreclosed on which started a domino effect onto the credit card companies. These are the same companies that are targeting home owners losing their homes to give credit to. These issues have required attention for years but no one decided to take any action until the economy totally tanked.
According to Chu (2008), senseless interest rate increases and falling credit lines are adding to the dire state of our economy. She believes that credit card use has turned our nation into one that promotes spending instead of saving. The high interest rates that are charged on consumer accounts on long-term balances gives companies their profits, along with over the limit fees and late fees. As consumers, it is understood that banks our out there to make a profit, but they are making billions of dollars while many families are having trouble purchasing food and paying their monthly bills because of the banks predatory lending practices. Chu also points out that banks are adding fees to credit cards if they are not used in a certain period of time(Chu, 2008). Consumers do not need any more fees, credit companies send consumers an entire page with nothing but fees listed on them; at a time when Americans have seen the error of their ways and are trying to get out of debt this is the sort of help we receive. There needs to be a happy medium between banks and consumers, regulations and policies should have been put into effect years ago to avoid the current financial crisis we find ourselves in. Consumers need to spend to stimulate the economy and lenders need to provide credit to creditable applicants that have the resources to pay them back without unnecessary interest rates and late fees due to the banks panicky reactions.
Yoon (2009) argues that credit cards have had a dramatic influence on Americans average lifestyle. They offered less fortunate families the chance to acquire very expensive items such as cars and jewelry. Yoon (2009) believes it is a beneficial situation for everyone as long as consumers can afford their monthly payments and do not purchase over extravagant unnecessary items that they can not afford, while lenders keep true to their contracts and implied interest rates. On the other hand, he agrees that credit card lending companies offer credit to risky applicants that may end up in default. He also believes that consumers need to be conscious of their spending and their current financial situation when making sure they will be able to make their payments every month. He states that there are many other causes for the high amount of consumer obligations, such as: job loss, the rising costs of healthcare, and other issues that arise due to the worsening economy. He agrees that high interest rates and late fees are a problem. Yoon (2009) found that, “In 1996, credit card lenders enjoyed $1.7 billion net income from late payment penalties. This figure increased almost 10 times to $12 billion in 2004” (p. 46-47). Yoon (2009) suggests that corporations and the government are the major cause of consumers problems and that they should be responsible for fixing it. He recommends, “the following policies should be implemented: lowering credit card interest rates, resurrecting a grace period for late payments, and establishing a temporary tax break for revolving credit card holders” (Yoon, 2009, p. 47-8). These recommendations would help both consumers and lenders. It would assist consumers in being able to pay their monthly credit card bills without defaulting or filing bankruptcy. It would help lenders in the fact that they would be receiving some form of payment rather than none, which further adds to the financial industry decline.
According to Tidwell, Bexley, and Maniam (2010), around one third of credit card debt is associated with high risk individuals. They also state that richer Americans are having trouble paying for their credit cards, it is not just the poor Americans that are having difficulty. They believe Americans have a credit card fascination, spending thoughtlessly without worrying about the bills that will need to be paid at the end of the month. As the economy becomes worse, many consumers are making all of their purchases using credit cards because the items they are buying are necessary and they will worry about how to pay for them later. Tidwell et al. (2010), also states that the U.S. market has been rising on rented currency. The market has been established for many decades utilizing rented funds from banks and now that it is time to pay the funds back many people are losing their houses and jobs making it almost impossible to give the money back to stabilize the market. To fix with the economic catastrophe, Tidwell et al. (2010), proposes that individuals start educating their kids about financial reliability as soon as they are old enough to understand the concept so they will learn how to make purchases and informed decisions early on. They believe that if we begin teaching our children about financial responsibility now, we can change the way Americans think about material possessions and safe spending so they will live during a period of great economic wealth and prosperity. They also point out that the government issued recent legislation in 2009 that is assumed to defend customers from greedy loan practices: the Credit Card Accountability, Responsibility and Disclosure Act (CARD); the CARD Act was enacted to protect consumers by banning interest rate increases on current balances (unless 60 days overdue), limiting fees, providing information consumers can understand, and giving a 45 day notice before any changes take effect so consumers have the option to cancel their card if they wish. Tidwell et al. (2010), believes that the CARD Act will assist consumers that are currently not in debt, but will offer no aid to those millions of consumers that are already in severe debt. For example, an article published in USA Today (2010), discusses the fact that companies are already finding different means to ignore the CARD Act and its purpose by utilizing interest rate formulas that only make interest rates increase. They are trying to offset rate increases by offering rebates to customers which unfortunately, they could get rid of at any time for any reason. It seems they are just trying to pacify consumers in order to get their high interest rates in effect, then they will get rid of any incentives offered so they can make more money.
There are both uses and abuses surrounding the credit card debate and one thing is clear both consumers and lenders bear some responsibility for the current state of the financial industry. Should one side receive more blame than the other The answer is unclear because there are many differing viewpoints describing what each side: lenders and consumers, is responsible for. They both have a responsibility to be fair and honest with one another in order to make our financial system strong and healthy. The solution to the problem is trust, who can enact policies and enforce the issue of trust If we all want what is best for our society we should work together to make our economy as strong and profitable for everyone and not just worry about ourselves. Lenders should set fair and affordable interest rates that will help consumers have the ability to purchase expensive items while boosting our economy at the same time. Consumers should be responsible with their spending and not purchase items they will not be able to pay for. It is hard to look into the future to know if you will be able to pay for extremely expensive items, but these are unforeseen circumstances. Most of the time consumers are knowledgeable enough regarding their own finances to know if they will be able to fully pay for their items or not. They should also pay close attention to their interest rates for their purchases and what will happen if they default at any time before using credit for their purchases. Americas thinking also needs to be changed because currently material possessions are considered the gateway to wealth. In order to change this way of thinking, just as Tidwell et al. suggested, we need to begin teaching our children at an early age to save money and the value of a dollar, instill in them values and morals, and they will learn that family and friends are the key to happiness, not money and possessions. If they wish to purchase something they will have a greater feeling of self gratification by buying things with money they have earned and saved instead of with borrowed money. Look at the amount of money banks make off of interest and late fees, this is all money we could be spending on ourselves instead of handing it over to the credit card companies. There is a solution that needs to come from both lenders and consumers working together to make it work. Most of the research showed that late fees, high interest rates, and declining credit limits are hurting the economy as a whole. If bank lending practices were conformed to be fair and just to consumers this would enable consumers to begin the process of trusting their lenders once again. Also, if consumers were responsible with their purchases, lenders would trust them and not have any problems with supplying them the credit to purchase items. This would begin a process of mutual trust that would enable our financial industry to become stronger as it grows and would limit the risks associated with consumer borrowing. This solution would enable our economy to grow and would benefit the global economy as well.
As new credit law begins, issuers up to old tricks. ( 2010, Feb. 22). USA Today. Retrieved from http://web.ebscohost.com.proxy.ohiolink.edu
Chu, K. (2008, Dec. 16). Changing credit card terms squeeze consumers. USA Today. Retrieved from http://web.ebscohost.com.proxy.ohiolink.edu
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Tidwell, M., Bexley, J., & Maniam, B. (2010, Sept.). Journal of Finance & Accountancy, 4, 1-12. Retrieved from http://web.ebscohost.com.proxy.ohiolink.edu
Yoon, I. (2009). Journal of Poverty, 13 (1), 40-54. doi:10.1080/10875540802623302