June 10, 2011 Leave a comment
Economist Thorstein Veblen posits that credit card companies are purely parasitical, charging numerous fees and penalties amounting to over $90 billion in revenue each year. According to a BCS Alliance study, credit card companies rake in profits of $30 billion each year. Penalty fees alone added up to some $20.5 billion in 2009, according to industry consultant R.K. Hammer.
Demand destruction (DD) can be applied to the issue of credit card (revolving) debt, where the cost of credit is the “interest rate”, and the supply of credit is tightened through the use of credit scores. DD can occur during a period of high prices or constrained supply, and results in decreased demand.
The above graphic shows credit card debt from a peak of $973.6 billion in Aug. 2008.
The following points are highlighted in the 2011 study, CREDIT CARD ILLS: REDUCING RACIAL DISPARITIES IN DEBT, by Andrea Freeman.
- Over eighty percent of households now possess credit cards.
- Fifty-four percent of white households carry a revolving balance on their credit cards, compared to 85% and 79% percent of African American and Latino households, respectively.
- Fifteen percent of African Americans and 13% of Latinos pay over twenty percent in interest, while only 7% of whites pay that much.
- In 2009, the median net worth of Latino households was $7,932, as compared to $88,651 for white households.
- In 2006, the Boston Federal Reserve Bank published “Credit Card Redlining,” a study by Ethan Cohen- Cole comparing the terms of credit card agreements entered into by credit card owners with identical risk profiles and payment histories living in different areas. The study revealed significant differences in credit card terms based on the racial makeup of the users‟ neighborhoods.
From the study “The Rapid Growth of Credit Card Debt in America”, by Jose A. Garcia, 2007.
- In 2004, 46 % of very low-income (under $9,999 per year) credit card indebted households spent more than 40 % of their income to pay off debt.
- On average, African Americans and Latinos earn 62 and 69 cents, respectively, for every dollar earned by their white counterparts.
- African-American and Latino households carry about $2,000 less debt, on average, but their balance amounts on average to more than 60 percent of their total available credit card limit compared to 47 percent for white credit card holders.
- Seventy-five percent (in 2004) of households lacking medical coverage for all their members carried debt on a credit card compared to 55 percent of families that had medical coverage for all members of the household.
The credit card problem is an issue that families have to address. What theoretically can be used to make ends meet, has been abused to the point where families become indebted for the long term. This recession may provide an opportunity to reverse this path and adopt less appealing (short term) measures like saving, and consumption deferral.