Adam Levitin at Credit Slips has been looking at bankruptcy fillings lately, and they confirm his worst suspicions about the credit card industry:
I’ve seen a bunch of cases with upwards of $60,000 of debt for a single debtor, a few with over $100,000, and the current record holder is $175,862.27. Yes, that’s right, $175,862.27. That’s larger than a lot of mortgages.
This debt was incurred on 25 cards from 12 different lenders, all major national financial institutions. No less than 9 of the cards and $80744.16 of the debt were for one lender, Bank of America. The debtor’s annual post-tax income is listed at around $85,000, and the debtor has been in her current job and industry for a while.
These kind of cases ought to really make us ask what’s going on with credit card lending. Clearly there is irresponsible borrowing. But it requires willing lenders. Cases like this look a lot like pushers and addicts. Unless we think a whole bunch of loan officers are routinely asleep at the switch, the best explanation is that card industry’s business model is not based on getting loans paid off, but is instead, as Credit Slips guest blogger Ronald Mann has shown, a sweatbox aimed at generating returns by keeping consumers in a limbo of financial distress for as long as possible. If that’s the case, we need to really rethink our model of credit card regulation and the BAPCPA provisions that stretch out the pre-bankruptcy period of financial distress.
If you look at those credit card offers that lard up your mailbox, you may notice that quite a few offer “balance transfers” at low introductory rates that kick up sharply in six months to a year. ‘Nuff said.
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Percentage wise, the banks make a lot more out of the many people who don’t file for bankruptcy than the amount they lose to the relatively few that do file.
This is why current practices won’t change.
These kind of cases ought to really make us ask what’s going on with credit card lending.
I can tell you what’s going on with it: interest rates are very high on unpaid balances, so if default rates are within limits it is a very profitable business.
This is why current practices won’t change.
Exactly.
this is exactly why more people need to be educated & have more discipline — things can change if more resources on the topic are available and we start teaching individuals how to use credit responsibly at a younger age.