I like to focus my blog on business related issues but I couldn't resist the urge to write about the current government proposal on personal taxes. This will directly impact the economy and our businesses.
According to the Federal Reserve, the average American family owes more than $8,000 in credit card debt. In 2004 the average household owed only $2,200 in credit card debt, which was up from about $1,000 in 1992. The debt shot up almost 400% in 4 short years. The household debt burden is now so high that many have to decide between paying credit cards, the mortgage or buying food. All of the blood has been squeezed from the turnip.
The solution out of Washington would be laughable if this were not so serious. It is to give 95% of Americans a tax credit that amounts to less than $10 per week or approximately $400 per year. At that rate, the average family will be able to pay off their credit card debt in 20 years. Not only is this not a good solution, but it doesn't address the root of the problem.
At the same time that the average household debt increased by almost 400%, the current statistics from the Fed show that national consumer debt jumped dramatically during that same period of time, from 2004 to 2008. What happened during those four short years? Did the average American suddenly go crazy with their credit card? Or did something else happen that caused the debt of the average household to increase so rapidly?
In order to understand what happened, it is necessary to take a hard look at the credit card companies. This is exactly what the Government Accounting Office did in their September 2006 report titled "Credit Cards - Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers". The report was prepared for Senator Carl Levin.
The GAO found that "credit cards now feature a variety of interest rates and other features, including penalties for making late payments that have increased to as high as $39 per occurrence and interest rates of over 30 percent for cardholders who pay late or exceed a credit limit". During the time period that the debt for the average household exploded, the GAO said that the portion of profits to the credit card companies as a result of paying penalties grew. And why not? A penalty is extra cash for the credit card company and does not reduce the balance owed by the card holder.
The biggest failure of the report is that it looked back at historic numbers and made statements like "a minority of cardholders appear to be affected". It failed to look into the future and see what would happen when those policies and practices began effecting many more cardholders. All of the signs were there but it failed to see that a tipping point was about to be encountered that would send shock waves throughout the entire financial community.
Isn't it ironic that Citigroup had the highest amount of credit card receivables in 2004 at almost $140 billion, with Chase and MBNA not far behind. The company that is guilty of usury by charging up to 30% interest and squeezing the life blood out of the average American is now controlled by our own government. Yet nothing has been done to rectify the abhorrent practices that have directly impacted the current economic crises.
There is an elephant in the room that nobody is talking about - and that is credit cards. If this problem is not addressed, this economic crisis will go on for many more years. Our government leaders are supposed to protect the people. They knew this was a problem in 2006 and clearly failed to take the right type of action. All they have done is talk about the fact that there needs to be more disclosure by the credit card companies to the cardholders. Are they serious? You have to be an attorney can decipher what it says!
Senator Levin has drafted a tough bill that will correct many of the malicious and greedy practices of the credit card companies, but it has yet to give birth through the legislative process. Even then, the lobbyists will have their say. Who knows when it will be voted on and when it will become law?
But why wait? Do we need a law to change the practices of companies that are largely owned by the American people?
Our representatives are still are failing to take action - even though they are now in the driver's seat. Why is that?
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