I have been thinking about the current financial situation in our debt-ridden country and I dare say that of many people regarding their personal debt and credit cards in particular. I recall the advice my dear sweet granny who once mentioned to me way back during the Great Depression. "Billy," she said, "if you don’t have any money, you had better have information-or at least know where to get it." In other words, "Get smart."
These days it is almost a necessity to have one or more credit cards. Not only are they convenient but often they are a necessity, particularly if you rent an automobile or make hotel reservations, purchase a book from Amazon or whatever. Of course, the cardinal rule is pay the balance each month to avoid the interest charges and try never to run a balance due the bank.
But that’s not always possible and that’s when it behooves one to be very cautious.
I had a balance on a card and always paid on time in excess of the minimum and never exceeded the line of credit. I had the card for years and was a good credit risk. I recently received a notice from the bank that my annual percentage rate (APR) was being increased to an interest rate that I considered exceedingly high, if not outright usurious.
I wrote the president of the bank and asked that the new higher APR be returned to the previous lower rate and cited my excellent payment record. Of course, I could have paid the balance off and restricted further use of the card but, as a result of an unrelated pressing commitment, it just wasn’t convenient for me to so at the time.
The president of the bank replied, thanking me for being such a good customer for so many years, expressing the bank’s appreciation for my business but "no," I had agreed to permit the bank to adjust its policies and rates at any time. This was true.
To say I was a bit irritated would be an understatement. So I exercised the right to "opt out" and remain at the lower APR and the account would be closed with the outstanding balance due at the previous lower rate.
"So be it," I thought, "but I’ll get my revenge. But how to do it? How could a poor ol’ country boy peering through the tall grass take on a huge financial institution and hit them where it would hurt most, namely, on their bottom line?" Then I remembered what my sweet granny told me years ago.
Dear reader, if you are interested in how the action of the power of one might adversely impact not only a single bank but the bottom line of all credit card issuing banks, then read the requests I made to Sen. Chris Dodd, chairman, Senate Banking Committee, which oversees the credit card industry, and several other members of the U.S. Congress (but not Kilili since he can’t vote); Douglas Shulman, Commissioner, Internal Revenue Service; Ben S. Bernanke, chairman, Federal Reserve; Tim Geithner, Secretary of the Treasury; Law Professor Elizabeth Warren, Congress Oversight Panel, Trouble Asset Relief Program (TARP) (the nemesis of all bank chairman who accepted taxpayer "bailout" money).
Here’s the subject sent to the above.
Exorbitant credit card interest rates (APR’s) thwart U.S. economic recovery
(A Suggested Economic Investigation by the IRS)
The article below forms the basis of a suggestion that the U.S. Internal Revenue Service should investigate issuers of credit cards and conduct a thorough comprehensive economic impact study to determine the adverse impact of excessive credit card interest rates as a factor toward reducing federal tax collections.
An official of the American Banker’s Association quoted in Frontline (PBS Television: www.pbs.org/wgbh/pages/frontline/shows/credit/view/) pointed out there are more than 641 million credit cards in circulation amounting to an estimated $1.5 trillion(1) in consumer spending-resulting in short- and long-term consumer debt. This same source indicated that the so-called "revolvers," namely those who carry monthly credit card debt, number about 115 million. These same authorities state that the average family owes roughly $8,000 in credit card debt which generated $30 billion last year for the credit card industry. I assume this estimate is the aggregate industry profit and may be in need of revision as my source of information is dated. Nevertheless, these data are indicative of the point I wish to make and that being that exorbitant credit card interest rates deprive the U.S. Treasury of millions in unrealized revenue.
Notwithstanding the positive benefits accruing to society by virtue of credit card use which are beyond the scope of this report and in any case are well known, in the opinion of this observer there is little appreciation of a particular negative issue worthy of further examination and research.
Specifically, the interest earned (dare I say, usury) by some card issuing companies over and above a reasonable nominal rate "soaks up" untold millions that otherwise would be available for consumer expenditures. This "sponge" effect results in a weakened economic multiplier by reducing expenditures to the overall detriment of the economy.
In many instances the interest imposed by the card lender is far in excess of an otherwise fair and reasonable return. For example, consider the rental of funds at a reasonable rate of, say, 6 percent interest (the "real" rate plus a rate to compensate for preserving the purchasing power of the borrowed capital at, say, 4 percent interest (or whatever the inflation rate has been projected to be). The result being a reasonable total finance charge (in this example) of 10 percent (the "nominal" rate). Understand the above percentages are cited as examples for the point I wish to make.
In the above example the "real" rate of interest is 6 percent. The "nominal" rate is 6 percent plus the rate of inflation, or 4 percent, for a total of 10 percent-a fair and reasonable return when inflation averages around 4 percent per annum.
Considering that many card issuing companies charge interest as high as 29.99 percent or greater on the unpaid balance, the difference between the two (minus 10 percent)-or 19.99 percent-is the amount which consumers no longer have available for discretionary spending and thus not available to function as a force for consumer multiplier expenditures within the economy. It amounts to hundreds of million of dollars annually and for the most part largely lost to all except the banks.
Economists refer to the multiplier effect as based upon the premise that one person’s expenditure is another’s income, multiplied over and over throughout the economy, and of course, taxed at each level of transfer which ultimately results in increased federal tax revenues.
Excessive credit card interest rates result in less federal tax collections because of the so-called "sponge effect of funds" or the card industry’s "absorption effect" on money that would otherwise be available for circulation by consumers within the economy, thereby generating increased revenue for the U.S. Treasury through the multiplier effect.
Exorbitant and excessive interest charges over and above a reasonable and fair earning’s rate for the industry is detrimental to the American economy over both the short- and long-term.
Reduced finance charges from present high levels to that of a reasonable and fair percentage for the issuing card companies obviously translates into more money available for consumer expenditures on the part of those more responsible card holders and increased revenue for the Treasury.
More reasonable and lower interest rates would also have the beneficial effect of encouraging the card issuing companies to exercise greater due diligence and discrimination in the provision of credit (something many did not previously do) thereby limiting their credit granting privilege only to those with a greater propensity (and ability) to repay their obligation rather than indiscriminately issue cards to every Tom, Dick and Mary Jane, which was so often previously based only upon the most cursory and inadequate review a potential borrower’s credit re-payment ability. The result of such a policy being that those card holders who do comply with card company payment regulations are penalized with high percentage rates to cover the defaults of the deadbeats who do not.
An excessive APR interest charge is money taken from the pockets of those who strive to diligently meet their monthly financial obligation. Their payment of the excessive interest, e.g., say 15 percent to 19.99 percent, represents money not available for the tax generating multiplier effect resulting from consumer purchases. This card industry abuse has been permitted by lack of regulation by the federal government and specifically the House and Senate Banking committees.
A comprehensive economic study of the above issue should be undertaken by the Internal Revenue Service to determine the long-term loss to the government’s revenue base, not to mention the consumer economy. To my knowledge no one has yet pointed out the revenue loss to the Treasury as a result of the imposition of millions of huge and unreasonable finance charges on the part of many credit card companies. This was confirmed by my discussion with economists at the Treasury Department.
In a nutshell, every dollar paid to meet exorbitant credit card interest charges above, say, 10 percent comes out of either consumption or savings. Less consumption means less profit for the seller/producer, which means less taxes paid to IRS and thus less income to the U.S. Treasury.
Of course, bank profits do also translate into salaries for executives and employees, equipment purchases and investment in construction of new banks and other structures and therefore does have a multiplier effect within the economy, but this observer submits such expenditures have far less impact than that of lower APR’s for the many millions of average, diligent card holders who do not invest in Swiss villas, foreign-manufactured yachts or the maintenance of extended residences abroad.
My opinion: The usurious APR rates charged by card issuing banks would be the envy of Mafia loan sharks. As for the opposition for real credit card reform on the part of some members in the U.S. Congress who have permitted this legalized larceny to take place, they are guilty of "economic treason."
(1) To reduce the sum of one trillion to a comprehensible figure, with one dollar (1/trillionth) equated to one second in 32,000 years. Source: “The Sizesaurus: A Compendium of Measurements” by Stephen Strauss
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