The myth of credit card abuse and bankruptcy
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The Center for Responsible Lending has come out with a new report busting the myths of credit card abuse being the source of rampant bankruptcy in America. Contrary to popular belief, it's not the misuse of credit for consumer goods that's causing the problem, it's medical costs and unemployment expenses that are sending people into the deepest end of debt:
- Seven out of 10 low- and middle-income households reported using their credit cards as a safety netâ€”relying on credit to pay for car repairs, basic living expenses, medical expenses or house repairs.
- One out of three households reported using credit cards to cover basic living expenses on average four out of the last 12 months; households that reported a recent job loss or unemployment, and those without health insurance in the last three years, were almost twice as likely to use credit cards for basic living expenses.
Reading this, I remembered an excellent interview with Elizabeth Warren, author of The Two-Income Trap: Why Middle Class Mothers and Fathers Are Going Broke, over on Frontline from last fall. She discusses the changes in credit card laws that attack middle America with their interest rates, and rely on those on the brink of bankruptcy to bring home the bacon:
[T]he best way to maximize profits for the credit card company is lend to everyone at 9.9 percent. And as soon as you think you've got someone who won't be able to go somewhere else to borrow the money, change the price, and move that price way, way up, hit them with $29 late fees and $35 fees and $50 fees, and collect, collect, collect. That's how it is that credit card profits have been rising every year over the past 20 years at the very same time that bankruptcy losses and bad-debt defaults have also been rising.
So think about what that means: Bad debts are going up; that is, the number of dollars they have to write off. Bankruptcies are going up, the number of dollars they have to write off. But credit card profits have gone up even more. Why? Because those people who are going into bankruptcy and the people who look just like them ... are little golden profit centers for the credit card companies.
[...] For the families who are carrying credit card debt ... it's not the richest 20 percent in the United States; they're paying off their cards in full, by and large. It's actually not the bottom 20 percent in the United States; they don't have as much access to credit, and they tend not to run up as much debt in credit cards. It's the middle; it's that heart of the middle class that's carrying substantial credit card burdens.