Why Can Credit Card Companies Charge Such High Interest Rates?
With interest rates as low as they are today, how can these credit card companies charge such high interest rates? To charge almost 25% in today’s market seems rather excessive, to say the least. Credit card companies are usually large financial institutions such as banks or stores. They say it is appropriate to charge high rates because they are issuing “unsecured credit” and they have to build in a cushion to make up for all the people who default on their loans. Make no mistake, these financial institutions are a powerful lobby and have many friends in high places. You may remember, last year, that the credit card companies were becoming alarmed because over a million people a year were claiming bankruptcy. As a result, we now have new laws that make it more difficult to declare bankruptcy. It seems like they get to have it both ways. In other words, they are reducing their risk by charging the high rates and by making it more difficult to default on the loans.
The reason you are getting so many offers for credit cards today is because the credit card business is so lucrative. The financial institutions don’t seem to mind that consumers are becoming so debt ridden that it threatens our entire economic system. There has been some real concern that if over one million people declare bankruptcy each year during an economic boom, how many more are going to declare when there is a downturn. The fear is that some of these financial institutions may not be able to sustain the losses that could come when ten million people declare bankruptcy. The makings for a huge economic catastrophe could be in the works.
Are we simply victims of these large financial organizations? Or, is it our responsibility to control ourselves? Most of us don’t drink poison knowingly. No, but this is a case of that old jungle disease called the “creeping crud”. We allow ourselves to be seduced by the “easy money” gradually. We fool ourselves into believing that we are going to make more money in the future and then we can afford to pay off the card/s. For many of us, our whole lives are invested in our business. When times are tough, we use the easy money to sustain us. There seems no other choice. Incredibly, some of us are able to acquire numerous cards and rack up $100,000 worth of debt before the institutions stop lending. We pay the minimum payments because that is all we can afford. To our dismay, even as our business succeeds and produces more money, we find that the extra money is going to pay the debts. If we have equity in our homes, we usually refinance and pay off the credit cards. It is temporary relief until the cycle begins again. Eventually, the equity in our home disappears, and we are back, owing a ton on our credit cards. It is a vicious cycle, if there ever was one.