Credit Cards: The Real Culprit in the Credit Crisis


It seems that the US Government, and many others, are finally realizing that giving out credit to people who aren’t disciplined about spending might be a bad idea. Wow…

Unfortunately, none of the measures they are putting in place really appear to be a solution to the problem, they are just a salve for the symptoms.

Bailing out banks with taxpayer money doesn’t change behaviour of people, which means the problem will still exist when the banks are back to making huge profits.

Some examples of credit culture:

  1. Credit cards are allowed to charge 20% interest, which is criminal considering that this money is loaned to them at rates below 5%!  Keep in mind that they already make 2-5% directly from the retailer for every purchase you make.
  2. Looking for a mortgage on my FIRST house, several banks informs me that I can get a mortgage so large, that I would be ‘house poor’ for the rest of my life.  Some may argue the bank is just trying to help me ‘fulfill my dream’ but I think this is just irresponsible.
  3. Watching CNN (I know… first mistake) their sage advice for their viewers is to “pay off more than their minimum payment on their credit cards”.  This isn’t exactly the kind of training people need to keep themselves financially healthy!
  4. How many times have you seen ‘buy now, pay later’ as part of an advertisement?  By the way… OAC means, ‘On approved credit’… which always seems to be approved…
  5. Do you ever remember, at some point in your youth, being required to sit down and understand the banking system, credit cards, compound interest, RRSPs, or any of a large number of other topics that impact your financial well being?  I don’t.  Our mandatory schooling does nothing to train us to live within our means within this credit-based society.
  6. Once the credit rating of people has been beaten to the point where a bank will no longer touch them, new opportunists pop up to take even more of what little is left.  This makes it even harder to climb back up the credit ladder!  Ever notice that you can identify low-income neighbourhoods by the appearance of a ‘Money Mart’ or similar shop that will charge you a fortune to get access to your cash?

Why am I picking on credit cards in particular?  Unlike mortgages, that allow you to purchase a home likely to appreciate at or above its interest rate, credit cards are given to people when they are young, the interest rate is very high, and the products purchased are likely to DEPRECIATE quickly.  Once you get your first credit card (I think I was 18) there is no training that comes along with this deadly credit weapon.  We should instill in people that the credit card is to carry temporary credit only, and to be paid off immediately, before it destroys your credit rating, and puts you in the downward spiral of credit dependency; this just isn’t being done.  Its credit cards that set the tone in the relationship between people and their credit at an early age.

Lets look at some ideas that may actually change things:

  1. Instead of the sage advice offered by CNN above: Suggest getting a line of credit large enough to pay off all your credit cards, lock it in at a fixed payment with your bank, cut up your credit cards and learn to live on money you have already made, not the money you MIGHT make in the future.
  2. The government should restrict the size of a mortgage that someone should be able to get, at least for their first mortgage.  This way, people can learn to live within their means before they get in over their head.  This also means that they should limit mortgages to 25 years instead of the rest of your natural life.
  3. Remember how useless high school was for learning about things in the real world?  Well, how about mandating some financial planning courses?  Use math class to illustrate the downward spiral of 20% compound interest on a credit card!
  4. Fundamentally change the credit card system.  I can’t argue with the convenience or even the safety of using credit cards, vs. carrying around cash or the risk imposed upon a vendor when a check is used.  I really like getting my 1% kickback on my Starbucks Visa.  Suggestion: Legislate that the credit cards to be linked to a bank account that the balance has to be paid of every month.  If there isn’t any money left in the bank, the card doesn’t work until there is.

Why is this unlikely to happen:

  1. I suspect Visa, Master Card, American Express, Diners Club and others have fairly good lobbyists, or soon will.
  2. The current size of our economy is based on credit.  Why have cars, homes, and other big ticket items become so expensive over the years?  Easy access to credit, and the prevalence of dual income families (more on that last point in a later post).  If this credit supply was to be limited, the economy would slow down significantly.  This is exactly what the government is trying to STOP by propping up the credit providers!
  3. Our system seems to be based on the financially smart taking advantage of the financially stupid.  Its not in the interest of those with the knowledge (banks, credit companies, financial planners) to reduce the amount of money you spend.  There is also the poor ‘Money Marts’ to worry about.
  4. We would have to accept a few years or even decades of hard times to adjust to the new system where there is less cash available.  North Americans are pretty soft, especially me, and aren’t willing to give up their ‘rights’ to credit irresponsibility.

Hopefully some of the more intelligence economists -those that have been warning for years of this credit crisis- will be able to get more attention for their ideas on how to fix the illness and not just the symptoms.

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3 Responses

  1. Hey Adrian – Just catching up on your blog…good post here. I am in the middle of this year’s Massey lecture series which is given by Margaret Atwood based on her new book on our debt culture…if you are interested the lectures are still free as podcasts at http://www.cbc.ca/ideas/massey.html

    Hope all is well.

  2. Excellent! Thanks Mike!

  3. It looks like Obama is finally catching on… 😉

    http://www.marketwatch.com/news/story/obama-pushing-credit-card-reforms/story.aspx?guid=%7BAEE4C377-0EC6-4521-BE8B-0BCA374BD2D9%7D&dist=msr_4

    If asked, I would be willing to be his financial policy advisor. 😉

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