I love the Internet. You never know what you'll find there. As I was poking around it the other day, looking for something interesting to write about, I stumbled upon the 2001 testimony of Robert Manning to the U.S. Senate's Judiciary Committee, regarding consumer bankruptcy. Manning is the author of Credit Card Nation: The Consequences of America's Addiction to Credit, a well-regarded book that I regretfully haven't read yet. Perfect, I thought -- here's a chance to hear much of his message, in a smaller package.
Here are some eye-opening statements he offered:
Consolidation and higher prices
"The last decade has witnessed a dramatic consolidation of credit card issuers. In 1977, the top 50 banks accounted for about half of all U.S. credit card accounts. The impressive revenues of most credit card portfolios has precipitated massive mergers and acquisitions over the last decade. For instance, Banc One's [since acquired by J. P. Morgan Chase (NYSE: JPM)] acquisition of credit card giant First USA in 1997 was followed by Citibank's (NYSE: C) purchase of AT&T's (NYSE: T) credit card subsidiary -- the eighth largest in 1998. Today, the top ten card issuers control over three-fourths of the credit card market . Not surprisingly, competition for clients is less likely to be expressed in the form of lower prices. Indeed, it is striking that the average cost of consumer credit card debt has actually risen over the last five years."
This is a sharp reminder of how sometimes our best interests as investors can conflict with our best interests as consumers.
Another recent historical change regarding credit cards that Manning points out involves how we use them: What was once seen mainly as a convenience is now seen by too many as a financing tool. Before, you might charge what you knew you could pay. Today, people often simply charge what they want and worry about paying it off later. Big mistake.
The second tier
"For instance, Wells Fargo formed a joint venture with Cash America (NYSE: PWN) (largest U.S. pawnshop company) in 1997 to develop a state-of-the-art system of automated, payday loan kiosks. Overall, credit card interest charges, penalty fees, and second-tier finance costs could total over $140 billion in 2001."
He goes on to criticize the "first-tier" banks for cutting jobs and wages and hiking prices for consumers while profiting off of the many Americans who've become pinched by credit card debt. [Here's an interesting recent Take on Cash America, by Tom Taulli. Meanwhile, Seth Jayson wrote about his interest in another pawnshop company, First Cash Financial Services (Nasdaq: FCFS).]
College students taken advantage of
If you've got any kids preparing to go to college within a few years, perhaps point them to our Teens and Their Money nook, or give them a copy of our Motley Fool Investment Guide for Teens book. Either can get your kid off on the right foot financially and may help them resist the lure of plastic.
He pointed out that while mortgage-related interest expenses are tax-deductible, credit-card-related interest payments are not. This makes me wonder what the world might look like if credit card interest were indeed deductible. For a family paying $2,000 per year in interest (as some really do!), it might mean a savings of $500 or more -- which might even be used to pay down debt. But perhaps this would delude people into thinking credit card debt is somehow OK. It's not -- even if you saved $500, you'd have paid perhaps $1,500 for nothing. Maybe the status quo is better -- those who are building equity in the world via home ownership are rewarded with tax-deductible interest, while those who are generally living beyond their means are not.
It feels callous, on my part, to cite those living with credit card debt as people living beyond their means. It's not even true, for many people -- I realize that. Sometimes unavoidable expenses just come up (perhaps a medical emergency) and the only available way to pay may be with plastic. Still, such situations can (and should) be avoided by a little planning. Create an emergency account -- we'll show you how in our Savings Center, which also features some special interest rates for Fools.
And as important as a savings and emergency plan is simply not permitting yourself to live beyond your means. If you can't afford to pay for that large-screen plasma TV with cash right now, perhaps you shouldn't be buying it right now. Do so and you may keep paying for it for many years.
It's not easy to live below your means -- but it's critical to do so, so that you can save money for a comfortable retirement. (Our Rule Your Retirement newsletter offers some great advice -- try it for free.) You'll find some support and good ideas on our Living Below Your Means discussion board.
Finally, a last question that Manning raises addresses responsibility: Should we be blaming the credit card industries and the companies in it for our current sorry state of affairs? Or are the ultimate culprits the consumers in debt? To me, it seems like both camps share some blame. What do you think? Share your thoughts on our Consumer Credit / Credit Cards discussion board.
Here are a few interesting articles on the credit card industry -- educate yourself, consumers!
Meanwhile, if you or anyone you care about is struggling with credit card debt, head to our Credit Center, which features tips on getting out of debt, along with guidance on how to manage your credit effectively. (We even offer a spiffy Motley Fool Visa card.)
This story ran on Motley Fool on September 30, 2004.