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Sunday, March 06, 2005

Credit card debt and bankruptcy

I made several comments when left blogger Honest Partisan criticized the bankruptcy law reforms. However, Instapundit has recently collected comments from the left, right, and center opposing this law, as well as pointing out that some Democrats in Congress support the reform. From the Blue Dog coalition:
"Allowing bankruptcy to become a financial planning tool rather than a last resort forces many of our constituents who pay their debts to pay for those who do not."

I am so far removed from this debate, as someone who treats his credit card like a charge card, paying the bill in full each month. I suspect it is too easy to write off debts caused by poor planning and wasteful spending, and agree that charges from the credit card companies are ridiculous. However, the return on lottery tickets is also ridiculously poor, compared to other forms of gambling. No, that's not a non-sequitur. The similarity between the two? Both are entirely voluntary activities. No one has to buy lottery tickets, and no one has to charge to a credit card more than they will be able to repay.

There's something I would like to point out: how hard is it to get a line of credit from a credit card, as opposed to a loan or a line of credit from a bank? Take this example from life insurance: one form of life insurance is issued if you answer a simple set of yes-no questions, and another requires full medical underwriting (physician statement, fluid samples, EKG, etc.) Which do you think will be cheaper? The former example, a simplified issue life insurance product, has higher premiums, because the risk is less known, and thus assumed to be higher risk. The credit from a credit card is similarly easy to get, and charges a higher interest rate to reflect the higher risk.

My outstanding question: how is a credit card company, which judges you capable of managing a level of credit at a particular point of time, going to know whether you continue to be able to manage that credit?

The Washington Post article that Instapundit links to says that the average household has 6.3 bank credit cards and 6.3 store credit cards. That is ridiculous. I only have 2 credit cards now because I got a new affinity credit card, and plan on closing the other account.


At 5:41 PM, Blogger honestpartisan said...

But credit card companies already discount the risk of default when they charge ludicrous interest rates for their consumers to charge. An increasing portion of their big profits comes from penalty charges, late fees, and bizarre charges like raising someone's interest rates if they're late on a payment that has nothing to do with the credit card.

Now the credit card industry wants it both ways: they want to charge the high interest rates that should compensate them for risk of default AND they want the federal government to help out in reducing that risk of default.

By the way, if this is about personal responsibility, what's your opinion about the amendment to treat debtors easier who file for bankruptcy because of health care bills? (about 50% of bankruptcies)

At 12:01 AM, Blogger Greg said...

I wholeheartedly encourage you to found a credit card company that doesn't follow these heinous practices. Absent that, find the bank with the best credit card policies, and urge public support of that bank.

I'm not familiar with the details of the amendment. On the surface, it sounds like a good idea, although someone could have medical expenses after spending themselves into a precarious situation. In addition, someone who has crushing medical bills because they decided not to buy health insurance isn't a model of responsibility. No amendment will be perfect at separating the responsible people who had some bad luck from those who were fiscally irresponsible.

At 2:46 AM, Blogger MoneyMaker said...

Of course, credit card companies can't know this, and all deals about credit including credit cards imply risks. They have to take hazards to engage new consumers.


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