In October 2008, many of the problems that have long been hidden in the credit industry finally showed up in a big way. The immediate response was for the government, the very same people who caused the problem to begin with, to now solve the problem by taking $700 billion of your money and mine and giving it to the people who created this disaster. Yeah, that works…
Since this book is about personal finance, I’m not going to talk much here about the problems with the mortgage industry and the government bailout. I’m going to focus on the credit industry which many of our politicians wanted to include in the bailout. The cause of the big financial crash is the exact same cause that will eventually burst the credit bubble: easy credit to people who lack financial discipline and the ability to repay it.
As I said at the beginning of this book, I’m not one of those people who run around saying it’s not your fault you’re in debt (excluding those who have experienced a medical catastrophe or some accident through no fault of their own). To whatever degree you are in debt from using credit cards to purchase lifestyle, it is your fault! Until you change your mindset about credit, no amount of good information on the predatory practices of the credit industry and how to avoid them will keep you from getting in debt.
So keep the number one foundational principle in mind as you read this section: you must change your attitude about debt in order to get out of debt and stay out of debt. You must accept personal responsibility for being in debt and not blame it on anyone else, including the credit industry. With that said, let’s take a look at the credit industry so you’ll know how to deal with them and avoid them in the future.
The credit product industry is a huge and extremely lucrative market earning in excess of $30 billion per year. That’s billion with a B. While the government has done a few things to regulate ridiculous interest rates, there is no regulation against fees and penalties, and that has become the primary way that the credit industry makes money. They charge you fees for every imaginable service or transaction and set up the system in such a way as to cause you to very easily began to rack up penalties as well.
Over 1 billion credit cards are in use in the United States, and about one and a half trillion dollars of transactions are processed on them enjoying one of the highest profit margins of any business. Credit card banks and lenders are some of the largest contributors to political candidates on both sides of the aisles. To believe that that does not buy them favorable regulation is to live in a dream world.
We hear so much about the evil oil companies and their obscene profits who make on average about 6% profit (while the government gets 18% on the same money) but never hear a word about credit card companies and lenders who jack up rates as high as 30% on top of collecting countless fees and penalties.
It’s amazing what banks and credit card companies get away with and never get reported. Financial Peace author Dave Ramsey pulls no punches and calls companies like American Express scumbags and predators on national radio. It’s hard to disagree with him considering some of the settlements they have been subject to: Citibank, $45 million for improperly assessed late fees; Advanta, $7.2 million settlement for charging higher interest rates than advertised; Sears, $36 million settlement for raising interest rates after saying they would not. The sad part is, $50 million is chump change in the credit industry. They settle these disputes for what amounts to be a painless penalty and then go right on doing whatever it is they were doing in the first place.[TIPJAR]
Don’t be fooled. The credit card company can say they will do something 27 times and it doesn’t mean squat. They can go about doing exactly what they want to do, and if and when they are ever challenged, simply pay a settlement and keep right on going. The credit industry is so lucrative that a few lawsuits are nothing but a slight nuisance in the overall scheme of profitability.
Educate yourself about the lending industry. Learn how to avoid the temptations, gimmicks and scams. Steele your conviction against buying lifestyle on credit.
With major changes coming no matter which candidate is elected next week, you need to heed the warning to get your financial house in order. Not only will this make the coming financial turmoil easier to deal with, it will actually give you opportunity to prosper in it.
I cover all this and more in my newest book, Life Without Debt – 2nd Edition. Find out more here…