There's a wonderfully entertaining video floating around the Internet of someone who's discovered how credit cards actually work, and she's not too happy about it.
In the video, an unidentified woman who claims to have two credit cards with Bank of America (NYSE: BAC ) , one of which carries a balance, is furious that the bank had the gall to raise her interest rate to 30%.
Rather than paying off the debts, she's taking a unique approach to escaping credit card hell. In her own words:
I'm here to tell you, B of A, I officially notify you, Ken Lay [sic], that I'm staging a debtor's revolt right here, right now, and thereby refuse to pay you one more red cent on your 30% credit card account. This is called 'civil disobedience'.
Now, these are my terms: Unless you return my interest rate and monthly installment amount to what it was before the rate hike, or you make me a too-good-to-turn-down payoff offer, you're not getting another penny out of me.
You can ruin my credit, but the banks aren't loaning money anyway. So the way I figure it, Mr. Lay [sic], I've got nothing to lose.
So stick that in your bailout pipe and smoke it.
The best part about this is the Freudian slip, confusing B of A CEO Ken Lewis with Ken Lay, the former CEO of Enron.
Other than that, the rant is pure, utter nonsense.
An honest rebuttal from someone who despises credit cards
Look, Ms. Thoreau, the credit card industry isn't ratcheting up interest rates because it wants to do you harm. It's doing so because it's losing insane amounts of money as people like you either can't, or refuse to, repay their debts.
Bank of America's credit card division is embarrassingly unprofitable, losing $3.5 billion in the first six months of this year as defaults soared. Most credit card companies can say the same thing:
|
Bank
|
August Credit Card Default Rate
|
|
JPMorgan Chase (NYSE: JPM )
|
8.73%
|
|
AmericaExpress (NYSE: AXP )
|
9.00%
|
|
Discover Financial (NYSE: DFS )
|
9.16%
|
|
Capital One (NYSE: COF )
|
9.32%
|
|
Citigroup (NYSE: C )
|
12.14%
|
|
Bank of America
|
14.54%
|
The interest rates that banks charge credit card customers invariably go up during recessions to compensate for increased losses. That isn't immoral or unjustified. It's how we should want banks to operate -- to price risk high enough so they don't become dangerously unstable and undercapitalized.
Want to see what really high, onerous, pillaging interest charges look like? Follow this lady's advice and stop paying off your debts. That'll do it.
It gets better
But even explaining that doesn't get to the heart of how absurd it is to stiff banks because you're unhappy with your interest rate.
People hate banks today because of what happened last fall: The system that held them together fell apart, and shocks reverberated throughout the economy.
No doubt, the system fell apart largely because banks made seriously bad loans. But it also fell apart because they had come to rely on short-term, variable-rate, unsecured financing that prevailed in what's now called the "shadow banking system."
As risk premiums grew last fall, the cost of this debt became prohibitive, if not totally unavailable, as global markets repriced its risk -- just as banks are now doing with credit card interest rates.
Banks that really relied on this funding -- like Bear Stearns and Lehman Brothers -- met quick deaths. Even banks with plenty of high-quality assets, like Goldman Sachs (NYSE: GS ) , faced sudden meltdown. Anyone reliant on financing a balance sheet immediately had to deleverage and scale back as risks and the cost of capital soared. This is where the "banks stopped lending" chant comes in.
Those selfish idiots!
Bankers, rightly, were then maligned for being greedy, stupid, shortsighted, and irresponsible. That these high-paid folks had the nerve to assume cheap and abundant credit would always be around to finance whatever garbage they wanted to buy seems immoral to us. And that they suddenly scaled back when its cost became prohibitive and the risks increased infuriates us.
But the irony here is extraordinary: When banks' risk and cost of capital on variable-rate debt increases and they choose to cut back, they're treated like vicious, blood-sucking criminals who are purposely destroying the economy. When this woman's cost of capital on variable-rate, unsecured debt increases and she threatens to outright default, she thinks she's being some sort of hero, doing us all a favor. It's maddeningly illogical.
No one, no one, has the right to rely on cheap, unsecured credit. Creditors take a risk by lending money on an unsecured basis, and you return the favor by accepting whatever rate they choose to quote you. It's worked this way for thousands of years.
The point isn't that banks, or the woman in this video, are either right or wrong. It's that short-term, variable-rate, unsecured debt holds you hostage to the whims of the market. If you don't like this and choose to stomp your feet in defiance when it goes against you, the answer isn't "civil disobedience." Nor is it begging for a taxpayer bailout when things explode. It's far simpler than that.
Just avoid the stuff to begin with, for goodness' sake.
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