In an interview with NPR’s Michel Martin, I explained how credit card companies are really financial drug dealers. While this comparison might initially seem out of the park, it is actually quite appropriate: Credit is like a drug: it makes you feel good, and it is difficult for most Americans to feel secure or comfortable without it. Also like a drug, credit can be abused. Americans are hooked on consumption and credit card companies are willing to serve us our drug to the point of financial ruin.
The difference between financial drugs and medical drugs is that most financial drugs are legal, no matter how harmful they might be. In 1979, Congress got rid of usury laws, allowing credit card companies to charge darn near any interest rate they wanted, any fee they felt applicable and any penalty they felt you deserved. In other words, the legalized financial drug dealers were allowed to run rampant and sell as much of their product as the addicts could consume.
Years later, you have a nation sitting on top of 700 million credit cards and $2 Trillion dollars in credit card debt. That’s more than 2 credit cards for every man, woman and child in America. Americans are swimming in debt and default rates are sky high. The wild financial party of the new millennium came to a crashing halt with the breakdown of the global financial system. In the midst of all this chaos, it was time for the government to step in and regulate.
Banks don’t earn profits from interest alone. They earn it from fees, penalties and other things you may not think much about. In fact, some credit cards could have an interest rate of zero and still earn a profit. Obama’s recent credit card bill, in all its complexity, can be broken down to one fundamental premise: It keeps the credit card companies from using fine print to sneak money out of your pocket.
The new legislation says that banks must give you full disclosure: they are required to tell you how many months it will take for you to repay the balance you owe, if you were to make the minimum payment.
Banks can’t raise your interest rate retroactively if you’ve been paying your balance on time. Bank statements must be mailed to you within 21 days of the due date. Banks can’t raise the interest rate offered to you within one year of signing the contract, and introductory rates must last for at least 6 months.
The most significant part of the bill is that the financial drug dealers are not allowed to prey on the young. Anyone under the age of 21 who applies for a credit card must prove that they have the financial resources to repay the loan, or they must get a parent or guardian to co-sign. This keeps the vultures from swooning in on college campuses, where the average student has over $3,000 in credit card debt.
Oh yeah, the bill also says that you can carry a concealed weapon in national parks. Don’t ask me why it’s there, but that’s just how Congress works. When you break down Obama’s bill, it appears that he is breaking down the bull with credit card companies. But the truth is that you are the one who is in control of your financial future.
Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lovemaking 101: Merging Assets with Your Partner in Ways that Feel Good.” For more information, please visit www.BoyceWatkins.com.
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