The world's gone plastic with well over a billion credit cards in use today. More and more of us are moving away from cash and checks and toward electronic payments. From paying bills on line to making purchases over the Internet, the use of cash and checks is experiencing a steep decline that shows no sign of abating.
But not all is well in the land of "What's in your wallet?" A plethora of bad press surrounds the "buy now and pay later" mentality of modern times. While much of the criticism is well deserved, using plastic is not evil in itself. We should not be too quick to canonize cash while outright condemning credit cards.
After all, there are some prudent reasons to have and use credit cards in moderation. Among them: improving our credit history and our FICO score; increasing our convenience when shopping, traveling or purchasing on line; obtaining merchant and insurance protection on purchases; garnering needed cash for life's little emergencies; availing ourselves of attractive rewards programs; and preserving an accurate record of many purchases made over a long period of time.
Still, credit cards come with a lot of stealth baggage which may be hazardous to both our financial and spiritual health. Consider the following:
A record number of us are using credit cards today to stay afloat. Sinking home prices from the sub-prime debacle have made it much more difficult to convert home equity into cash, so many of us are increasingly turning to credit cards for our daily needs.
Credit card companies can change the interest rate on money they have already lent us through a "universal default" provision found in the fine print of most contracts. This provision means that banks can legally raise our card interest rate when it has reason to believe that the risk of being repaid (i.e., our FICO score declines) has increased, even though we may be current on all our payments with respect to their particular credit card.
There is no federal limit on the interest rate a credit card company can charge. If you've ever looked at the return address on your statement, you may have noticed your credit card issuer is located in a state such as South Dakota or Delaware. That's because your card's interest rate is determined "where the credit decision is made" and these two states essentially have no "usury laws," meaning there is no cap on the interest rate that can be charged.
There is no federal limit on the amount a credit card company can charge in late fees. Late charges and over-the-limit fees, often ranging from $30 to $40 per pop today have been a boon to the banking business, helping credit cards become the most profitable division for financial institutions.
Credit card companies get more complaints than virtually any other industry, due in part to increasingly aggressive marketing practices, yet state usury and consumer protection laws are fundamentally worthless. The national Office of the Comptroller of Currency ("OCC") is essentially the exclusive regulator here, and other than pressuring credit card companies to raise the required minimum monthly payment from 2% to 4%, the OCC has been fairly reserved in taking action.
Studies repeatedly show that we generally spend more freely when using credit cards than we do with cash and swelling card balances are on the increase. According to recent data by CardTrak.com, the median (middle number) amount of credit card debt carried by Americans is about $6,600 while the mean (or average) credit card debt load is nearly $9,900.
The "sweet spot" for most credit card companies comes from consumers who carry high balances, consistently make the minimum payments and occasionally make late payments where penalty fees are incurred. Those of us who pay off our card balances on time monthly are affectionately known in the industry as "deadbeats."
Most of us truly do not comprehend how credit card debt works. Studies repeatedly confirm that the majority of us do not comprehend debt and the effect of using compound interest to calculate how long it would take to pay off the debt. For example, by making only the required minimum monthly payments of 4% ($200.00) on an outstanding card balance of $5,000 at an 18% APR, it would take 12.5 years to pay off the balance, with total interest paid of nearly $3,000. (**The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, now requires credit card companies to post a kind of Surgeon General's warning on monthly statements that notifies borrowers about how long they'll be in debt if they make minimum payments.)
Most of us do not fully pay off our credit cards every month and tens of millions of us make only the minimum payment. This is true even though we may have money in the bank earning a much lower rate of interest.
Significant credit card debt puts us at a markedly higher risk of bankruptcy, but going bankrupt usually isn't the result of spending sprees. More commonly, bankruptcy is triggered by a job loss, medical problems, or a divorce. Those hit by any of these misfortunes increasingly turn to credit cards to stay afloat, but oftentimes end up financially drowning under the weight of increasing interest and penalty fees.
Credit card debt is frequently cited as a proximate of cause of depression, health concerns and familial/marital breakdowns. Unfortunately, the statistics overwhelmingly reveal that there is a high correlation between the misfortune wrought by excessive debt and the credit cards used by those people to accumulate such debt.
Debt, particularly debt which becomes excessive, is nothing to fool around with and can create a serious spiritual impediment. Throughout Scripture we are continually warned not to take on debt because it can easily take us away from loving God and our neighbor.
Perhaps more of us need to take charge of our economic lives by cutting up the majority of our credit cards, switching mostly to debit cards instead and heeding the words found in:
Matthew 6:24 — "No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and money."
Luke 8:14 — "…but as they go on their way they are choked by life's worries, riches and pleasures…"
Proverbs 22:7 — "The rich rule over the poor, and the borrower is servant to the lender."
Romans 13:8 — "Owe no one anything except to love one another, for he who loves another has fulfilled the law."
If you find yourself with debt problems today, please know that you are not alone and there are programs out there like www.veritasfinancialministries.com that can help you break free from the bondage of consumer debt in accordance with Catholic principles.
Economic and Governmental Institutions are Moral Agents that Need to do More
Too often the business goal of relatively sophisticated financial institutions is to aggressively target massive numbers of less-informed individuals and get them "in the credit game," without taking the time to properly explain to them how the game will ultimately be played.
In greatest jeopardy are low-income families who tend to carry higher credit card balances and are subject to higher interest rates. These are the same people who are also vulnerable to getting caught up in the vicious cycle of pay-day loans (short-term, high-cost loans paid with the borrower's next paycheck), where APRs of 400% plus are common.
Although theologians can debate the technical meaning of the word "usury", as the expression of it has changed with the marketplace over the course of time, Catholic Social teaching still condemns usurious acts as immoral.
It can be argued with some degree of success that free markets necessitate financial institutions charging much greater rates to compensate those entities for taking on much greater risks and that, furthermore, these businesses exist simply to empower disadvantaged consumers by supplying them with greater financial options.
Even so, all economic institutions have a duty to act as moral agents and to protect the dignity of the human person. Incumbent upon them is a moral directive to serve the common good, with a clear priority for the least among us.
The salient question is: Are these businesses truly empowering their borrowers with easy credit options or are they in essence exploiting the poor for profit?
While too much regulation in the marketplace is sure to be counterproductive, this is one area where government needs to do more. One possibility is to look past the significant lobbying efforts in favor of the status quo and re-enact a federal cap on rates that can be charged. Perhaps ten (10) points over prime rate, which at this time would be 16%, may be prudent. This would not only help curtail usurious interest rates, but it would also help pressure lenders to become more responsible about screening and finding qualified applicants, all without destroying economic incentive.
In dealing with the world of easy unsecured credit, we would do well to take note of the following lesson learned from the current sub-prime debacle within the secured mortgage industry: Borrowers, lenders and government all must take greater ownership and responsibility in doing what is right for the common good and for other stakeholders in the greater marketplace.
Finally, when it comes to the plastic that's in your wallet, sometimes it really does pay to leave home without it.
