By Donald A. Hayes, Attorney at Law
Congress has allowed commercial credit card lenders to charge exorbitant interest rates of 21% and higher when at the same time the corporate prime rate, the home loan rate, and the new car rates are all below 10%. If you or I attempted to charge such rates it would be considered usurious and quite illegal. Why is this? The unstated policy of Congress is to allow the free flow of credit to spur the economy thereby maximizing tax revenues and lowering unemployment. As a trade off Congress, by enacting Bankruptcy laws, allows debtors to discharge their credit card, and other debt, so they never have to pay it back. This appears to be a fair trade off until we look closer at who is really making out.
I once saw an illustration on television by someone from a credit card company who explained what the huge bankruptcy charge offs really mean to credit card companies. He compared the total interest rate charged with the ratio of credit card expenses as a percentage of that total interest rate.
First, from the 21% interest the card company charges, deduct the cost of funds at around 4% or less, then deduct the administrative overhead to run the credit card operation, say 4%, then factor in the huge bankruptcy charge offs and uncollected debts at around 5%. This leaves a big fat profit of 8% of the total 21% interest that some credit card companies charge. And that translates to a huge profit despite the alarming record number of bankruptcy charge offs! Compare this to a commercial lender who charges the prime rate to its preferred corporate customers. The prime rate might be 7% from which the lender must cover its cost of funds, administrative expenses, and charge offs. When you are starting off charging 7% on a loan there is much less profit to be made in the deal as compared to charging 21%.(It is acknowledged that some card companies are charging nearly 29%!)
No wonder you customarily see dozens of unsolicited credit card applications which come pre‑approved in the mail. In my practice I see people come in on the brink of bankruptcy with staggering credit card debt for which there is no hope for repayment in their lifetime.They are miserable and very saddened by the thought that they have no other choice but to file bankruptcy. Many of them are by nature very conscientious about repaying their debts but find that they just cannot keep up with the debt load. They have to rob Peter to pay Paul. Yet they continue to receive unsolicited credit card applications in the mail with $10,000+ limits! All the while these same people could not go to the bank and borrow as little as $500. How is this? Well, credit card companies play the percentages, and since they know that there is a lot of profit to be made, they try to lend as much as they can. The charge offs are just a cost of doing business like everything else. They do not have the same conservative lending practices of most banks because they have the ability to charge you as much as 29% interest. So they become careless and for the most part undiscerning as to who they give credit cards to. So next time you think about filing bankruptcy, don’t feel guilty or waste your tears on the loss suffered by the credit card companies.