5%, 10%, Yes, even 15%

A flimflam? You betcha.

A TV commercial for one of the TBTF bank credit card businesses came on the other night (yes, I watch TV, but only for the articles… no that’s not right…).

These unrealistically happy people in the commercial were going on about the cash back they were getting from their credit card company. Buy this and get 5%. Buy that and get 10%. Yes, you can even get 15%, if you buy those kinda things.

We all know the stories of the drug dealer giving the customer a couple of “samples”. The customer gets hooked and becomes the “user”. The credit card folks went from a simple consumer credit convenience product that was reasonably priced to a fully built out, completely addicting, customer screwing product with millions of hooked “users”.

And, you thought the neighborhood drug gangs were dangerous? Read on.

Why did the credit card companies change? Well, the banking business, especially for the TBTF folks that have been created since the elimination of Glass-Steagall, can have some bad cycles, especially when they go way out on the risk curve and loose billions.

While they were loosing these billions, someone noticed this burgeoning credit card business. They could borrow from the Fed window for a couple of points and lend that money out for 10% or so, a nice eight point or more spread. (Today the spread is more like 30% since the fed window is effectively zero and the card rates have often been bumped to 30%.)

Folks had become more and more addicted to their credit cards.

Then during the TBTF institutions recent trip down the risky road, all hell broke loose. Without going into why that happened, these folks looked at this huge collection of addicts, err… customers, they had hooked in their credit card businesses.

First came the fees: late fees, over limit fees, currency conversion fees, reward program fees, activity fees (if you DON’T use the card), paper statement fees, payment protection fees, reward recovery fees, and whatever else they can think up. Now some of these fees had been around for a long time but they were increased to some pretty dramatic numbers.

Credit lines were reduced, minimum payment calculations were changed, rates were increased, and rates were made variable. All of this was often done without any change in the card holder’s credit rating. The cute finagles of the credit rating agencies will have to wait for another day. Were they complicit? You bet.

Two of the participants in the current economic troubles were actually tasked with writing regulations to avoid such bad things in the future, Dodd and Franks. Oh, the arrogance of government.

At least the idea of having the bank robbers write up how to keep the bank from being robbed seems like a good idea. When the bank robbers are still walking the streets though, do you thing their new regulations will stop the problem or just move it to a new venue?

Bankers said these changes to their credit card products were made to adjust for the “new market reality”. Whose reality? Theirs or yours?

Kicking the habit isn’t easy. Beating them at their own game is not impossible but it is really difficult.

I believe that these “products” are no longer viable for consumer use. The 5%, 10%, yes even 15% messages are designed only to keep you addicted not to benefit you.

What to do?

As I have written elsewhere here, “Credit Cards Are Not Local”. You can start by not using them to buy coffee. You can stop using them to “keep track of my expenses”. Pay them down and put them in the desk drawer. Use another form of payment for your online purchases. Use cash. You can get a credit card from the local credit union but these have their own problems. Sure, they are better than the TBTF cards but be careful.

Most credit cards now are operated by the TBTF institutions, e.g. your gas cards, department store cards, etc. They are all are bad deals.

The big idea? I think this is a perfect time for a new, perhaps locally provided, consumer credit product.

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