USA Today
This week I got three letters from credit companies, all wanting me to sign up. One of them congratulated me on having been "selected" for a credit line of up to $5,000. Another commended me for being one of its most "valued" patrons and offered me a "low introductory" interest rate plus a free cell phone. The third assured me that my "financial needs would be taken care of." It also promised me extra frequent-flier miles if I signed up now.
I was flattered by all of the attention. Then I did some research. Last year, credit card companies sent out almost 4 billion solicitations - the equivalent of 16 letters to every man, woman and child in the United States. If you could breathe, you probably received one. If you could write your name, you got 12. I even found a dog that got one.
Credit card issuers aren't overly worried about whether the people they're soliciting are good credit risks. People who owe money on 10 different credit cards still get more mailed to them.
The fact is, credit card issuers want people to borrow beyond their means. That's how they make their money.
If you haven't noticed - and if you haven't, you'd better start now - credit cards charge an interest rate on your unpaid balance that's much higher than the interest rate you pay on your home mortgage or your car loan. And credit card issuers don't tell you how long it will take you to pay off your outstanding balance if you make the minimum monthly payment. The idea is to keep you paying - and paying.
Two hundred years ago, people who couldn't pay their bills went to debtor's prison. Now, if you get into really deep trouble, you can declare personal bankruptcy under Chapter 7 of the bankruptcy law. That means you go to court and show why you can't pay your bills and still survive on your income. Personal bankruptcy lets you wipe the slate clean and start over.
But personal bankruptcy isn't a free ride. It also makes you a bad credit risk in the future. Don't expect a new car loan or second mortgage after you've declared personal bankruptcy (although you still may get a new credit card in the mail).
More Americans declare empty pockets
Still, a lot of people are choosing this way out. The rate of personal bankruptcies is skyrocketing. Last year, almost 1.4 million Americans filed for personal bankruptcy. That's more than triple the number a dozen years ago, and accounts for 97% of all bankruptcy filings. Statistics show that the overwhelming majority of these people simply got in over their heads. Credit card debt was a big part of their problem. Credit card debt is also the fastest-rising category of debt.
But if you're planning bankruptcy, you'd better move fast. The bankruptcy door is about to shut. The credit card industry - the same group that sent out those 4 billion letters urging people to sign up - has been pushing Congress to close it. Seems that all of the personal bankruptcies of late have started to hurt the credit card business.
A few weeks ago, the U.S. House passed by a veto-proof majority a bill that would make it much harder for people to declare personal bankruptcy. Under this bill, bankruptcy judges couldn't reduce your debt payments even if your income dropped to a point where you barely had enough on which to live. And your duty to repay would have the same priority under the law as child support payments.
Don't let either side off easily
Now, let's all agree that people need to take more responsibility for their finances and shouldn't be let off the hook too easily. There may be a legitimate argument for tightening bankruptcy law so people have more incentive to be careful about what they can afford.
But financial responsibility is a two-way street.
There's a good argument for giving credit card companies more incentive to be careful about whom and how they solicit. And they ought to be required to give people better information about the financial holes they are digging for themselves.
Other lenders have to tell you how long it will take you to repay your debt, if you pay the minimum amount due each month. At the least credit card issuers should have to do the same.
This new bill, now on its way to the Senate, would impose excessive hardship on people who already are very hard up. It would turn the bankruptcy courts into collection agencies for credit card companies. And it would make the credit card industry even less responsible than it is now - which is almost not at all.
