This post is the tentative conclusion to a series of posts, loosely about the sorts of pseudo-scams that credit card companies use to keep borrowers in debt, which series began as a response to an article I read in Business Week. After all, the fact that most credit card debt collection is an outright scam, is both the tip of the iceberg, and the roundabout culmination of a business practice based on exploitation.
The process by which banks create money is so simple that the mind is repelled. – J.K. Galbraith
The scams are, in no particular order of importance (since they all feed off of, and enable one another):
- Debt Collection Practices & Impropriety
- The Reverse Payment Prioritization Scam
- The Balance Transfer Scam
- The Penalty Rate Scam
- Exploiting Ignorance: Money for Nothing
A brief review is in order: when borrowers default on a credit card contract, arbitration is generally foisted upon the debtor, by the creditor. The credit card companies are able to game the informational asymmetry they acquire over the course of many proceedings, to exclude arbitrators who show any tendency towards siding with the debtor.
Lurking below the surface, are the pseudo-scams that are used to keep borrowers in debt. Credit card companies routinely apply payments towards the principle bearing the lowest interest rate first, in an effort to create negative-amortization, and so as to collect more unearned interest payments. They offer low-interest balance transfers in an attempt to create such a negative-amortization situation, especially to their most-worthy customers (who are not otherwise profitable for them). Often, a single late payment causes interest rates on all debts (sometimes even on other credit cards underwritten by the same company) to rise to usurious heights.
Most people do everything they can to stave off default until it is the only available option. At this point in time, they have probably had use of their card(s) suspended for several months, they’ve accumulated mountains of spurious fees, and excessive interest charges. This phantom debt is then presented to an arbitrator who is, for all intents and purposes, chosen by the creditor, and used as the starting point for default negotiations, liens or encumbrances to be filed against real property, structured repayment agreements, and so on.
The circle is complete.
Some people might posit that consumers should make more prudent decisions, but when every lender is in-fact a loan-shark, and the monetary system is a scam that destroys the value of savings, decisions are often made that would otherwise be deemed imprudent. Capitalmarkets are profoundly distorted by legislation and monetary policy, as a result institutions are able to “loan” money at teaser rates which no honest man could bear.
If everyone paid off their balance in full each month, credit card companies would quickly go out of business, because there are few things less profitable than giving out perpetually interest-free revolvers.
Credit card companies are, as a matter of fact incapable of profiting from responsible borrowers. It is impossible to profit from these borrowers, because it’s impossible to charge them. It’s impossible to charge them, because all credit card companies have the legal privilege of creating debt obligations from thin fucking air. If one credit card issuer wanted to issue 30-day notes payable, they would quickly be undercut by another issuer who wrote the same obligations at a lower interest rate, and so on. The result is that none of the companies are capable of charging these customers anything.
The credit card companies’ modus operandi, is to figure out new and creative ways to get people to violate some obtuse term in a contract of adhesion, such that they can then charge whatever they’d like. Precisely, the problem is that they don’t want you to pay off your “loan” every month. They want you, indeed, they need you to carry a balance. So they come up with neat little ways of trying to prevent you from paying off your balance. E.g., a “zero-interest balance transfer” is worthless, if you’re already carrying a balance – even a small one that you intend to pay off.
They prey primarily on financial ignorance, and although there is certainly some culpability on behalf of debtors, the primary reason for any of these situations is a political environment that encourages the creation of ex nihilo, no-interest debt obligations, and a legal environment that tolerates same.
Loans, or the extension of personal lines, always entails the lender’s sacrifice of present consumption in order to enjoy a greater future consumption. The “debt” embodied on a credit card statement is not, in any meaningful way, tied to any distinct amount of real, accumulated wealth. Nobody has lost anything when the borrower defaults, on the contrary, whosoever he purchased goods from has already received and has likely spent the money that was created out of nothing.
Fiat credit is NOT a loan for which anyone has put up any amount of collateral; it is a fiction and a fraud.