The Sub-Prime Industry

Posted by: Henry B. | Jan 06,2008


Here’s a good editorial talking about how the credit crisis is a two-way street: it’s the product both of irresponsible spending on the part of consumers and the predatory practices of credit card companies.  Yesterday I took our consumer culture to task for being part of a kind of feeding frenzy of materialism.  People aren’t going into debt because they are forced into buying daily necessities on credit, but because they buy every Xbox to come down the pike.  

That’s the cold truth and one of the major reasons we’re facing a credit crisis.  By all means, credit card companies tack on a mind-boggling array of fees and are able to change the terms of service “at their discretion” – which basically makes any credit card contract totally moot.  What’s a contract if it can be changed at will?  The answer: a meaningless piece of paper.  

So obviously credit card companies are to blame as well.  Like the subprime mortgage industry, credit issuers looked for short-term profits over long-term gain.  They’ve been handing out credit cards left and right, no matter what the person’s credit history.  Those same people have been racking up high balances on their cards.  

The thing about the credit card industry is that they’re still making a tidy profit while their customers suffer.  This is different than the mortgage industry, where foreclosures took a huge chunk of change out of lenders’ pockets.  Credit card companies can afford to lighten their fees and get rid of such policies as the universal default clause.  

One problem with this is if card have lower fees, you could imagine that people would overuse their cards even more.  I mean, if people are spending this much on credit when their cards have ridiculously unfair terms, what would they do when the fees were lower?  It probably wouldn’t be pretty.  But it’s better than the alternative: credit card companies profiting off of people’s bad habits for short-term gain that will likely have some serious long-term consequences.  One good reason to get out of debt – beyond the importance of personal gain – is to stop helping fuel what is not a very healthy system.   

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