Debt as Investment

Posted by: Gene M. | Dec 14,2007


The weird thing about debt is that it is so lucrative.  You’d think having millions of people using a bank’s blank check would bankrupt the bank overnight.  Fortunate for the credit industry, people rack up ridiculous interest rates so that they’re paying out twice what they initially spend on the card.  That’s how creditors make profits.  

There’s another angle to this.  The subprime mortgage crisis occurred because investors were using subprime mortgage deals as investment.  The more subprime mortgage deals were made, the more collateral investors had.  Another way of putting that is that they made big bucks in the short term, without looking at the long-term consequences of this type of investment.  When the subprime industry fell apart, all that investment money went with it.  

Does credit pose the same type of problem?  After all it’s a similar system.  In the past, it used to be much harder to get a credit card.  You had to prove your credit worthiness and your limit went up baby steps at a time.  Now just about anyone can get a credit card.  My credit card company sends me cash advance checks every time they send my bill, and sometimes more than that.  These cash advance checks have a horrible APR that would keep me saddled with debt for months, if not years, to come.  The verdict is that my creditor wants to keep me in debt.  All those credit card offers out there are to make sure more people stay in debt, as a method of investment and profit.  It’s similar to the subprime market in that these new accounts are being given out by the bushel-full, without regards to how these accounts will perform.  

There is a significant difference.  If a subprime credit cardholder decides that he can’t afford his current card and never responds to collection agencies, the bank is going to be out a fraction of the typical mortgage.  Now, if everyone was $100,000 in credit card debt and everyone decided to stop paying all at once, that might be damaging, but that’s not going to happen.  With the fairly obscene profits from current interest rates on cards, the credit card industry is well protected.  So a credit card meltdown is not as likely as the subprime meltdown.  If anything it’s going to make your rates go up, rather than make the industry some to a screeching halt.   

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