The high cost of cheap credit
THE NEW credit card law has been widely hailed as a David vs. Goliath victory of hapless consumers over venal lenders. "People can feel a lot more comfortable about the rules of the game," Adam Levin, chairman and founder of Credit.com, told the Associated Press. "But there will be some fallout, and it might be a short-term negative."
Among the negatives Levin cites are higher introductory rates and fees. But when it comes to credit cards, is raising the price of entry and ownership really such a bad thing? You don't need a credit history or even a job to get a credit card. Kids typically get their first solicitations in high school - one out of three high school seniors use them, and half of those carry cards in their own name. Seventy-eight percent of college students have credit cards, and, according to student loan maker Nellie Mae, typically carry a balance of $3,200. One out of 10 college students is more than $7,800 in the hole to at least one credit card company, and only 19 percent manage to graduate free of credit card debt. Yes, students and easy credit can be a dangerous combination, but not necessarily the most dangerous. That would be easy credit and the bankrupt.
In a shocking study titled "Bankrupt Profits: The Credit Industry's Business Model for Postbankruptcy Lending," Katherine Porter of the University of Iowa found that 96 percent of those polled were offered new credit in the first year after they declared bankruptcy. Porter concludes: "The modern credit industry sees bankrupt families as lucrative targets for high-yield lending, a reality that has important implications for developing optimal consumer credit policy and bankruptcy law."
Lucrative targets, yes, but whose fault is that? Surely some of the blame must fall on consumers willing to take lenders up on these "unbeatable" offers. Over the past 18 months or so, thousands of foreclosures and bankruptcies have made clear that what seems like cheap credit is anything but a bargain. Cheap mortgages led us to believe that we could afford to pay more for a home than we should, with the promise that when we run out of money we can just "take it out of the house" in yet another "easy" mortgage. When we maxed out one credit card, we just pulled out another one - after all, they were "free."
Cheap credit disassociates our wants from our needs, distances the thrill of ownership from the kill-joy vexation of having to pay for it. But credit is a tool like any other - a chain saw comes to mind - that is extremely useful when used with knowledge and forethought, but extremly dangerous if used capriciously. The siren call of "low, low introductory prices" can mislead us, not only in the case of credit, but in many things.
Cheap loans, cheap goods, cheap food all exact a price. In the long run, many of us pay through the nose for all those incredible "bargains," not only with our credit ratings, but with our health, freedom, and even our futures. Freshly minted college grads chin-deep in debt have little choice but to grab whatever job they can, regardless of its long-term prospects, or its relationship to their interests and goals. Home "owners" who bought into "no money down, low-interest" balloon mortgages discover too late that they not only do not own their home, but that the bank owns them.
Bargain hunting is a time-honored tradition, and that's not going to change, nor should it. But psychologists agree that the "thrill" of bagging a great deal is frequently followed by deep regret and disappointment. It's time to put the false era of "something for next to nothing" behind us, to stop paying for our future on the no-money-down "installment" plan.
The power to enact change resides not only in the voting booth, but in our wallets. The first step is to recognize that our purchasing decisions have consequences that go well beyond the immediate deal at hand, and that over time a low price of entry can exact extraordinary long-term costs.
As individuals and as a nation, it's time to rethink our "buy now, pay later" mentality, secure in the knowledge that real value has never been and never will be cheap.
Ellen Ruppel Shell, contributing editor of the Atlantic, is author of "Cheap: The High Price of Discount Culture." She teaches journalism at Boston University. 