Monday, February 25, 2008

Pushers, Lenders and Debt Junkies

Is the analogy that lenders and banks are essentially pushers and Americans are debt junkies over the top? Perhaps not.

Let's start with a pernicious truth about credit: if you don't have any, then you'll never be able to obtain a home mortgage. Like any good pusher, the lending industry must first create a need, and then be the only source to fill it. In this case, the "need" is a high credit rating, for without a good credit rating, you will be unable to qualify for a conventional (low interest rate) mortgage.

So how do you establish good credit? By taking on debt. There is no other way. It's a pretty sweet setup: if you ever want to buy a house via a mortgage, then you have to open and use credit accounts--the more the better in terms of establishing a high credit score. Having one revolving credit account (say, a Sears charge card) isn't going to do much for your creditworthiness; better to have a half-dozen credit accounts which you pay on time like clockwork. That establishes you can handle debt responsibly.

You know what lowers your credit rating? A bunch of unpaid loans, to be sure, but having no credit cards or other loans (consumer debt, auto, etc.) also marks you as a credit risk. No credit history? You're a risk. Thus paying in cash one's entire life will insure that mortgage lenders will cast a gimlet eye on your application.

The "pusher"--the lending industry--now has an unbeatable sales pitch: if you ever want to own a piece of the American Dream, come open a bunch of credit accounts. And like any good pusher, the initial offers are beguiling indeed.

A popular technique is the "student credit card" which is showered on college students like nickel bags of dope. Give the kid a $300 or $500 limit and he or she will run it up to the max in no time. Then, of course, the price of the "product" --in this case, debt-- quickly jumps. Now you nail the kid with $35 overlimit fees, and $35 late fees. It doesn't take long for the lender to recoup $300 in interest (the rates are 18% to 24%, or even higher if the local law allows) and fees--and the new debt junkie has barely paid off any of the principal.

Let's say the new debtor manages to avoid the snare by paying off the balance every month. The pusher then ups the "free money" in ever more enticing amounts. Now that you're proven yourself so responsible, now we're giving you $5,000 limit and a 9.75% rate--our very best!

If you never use your account, then you get credit score demerits; having credit without running up debt is a big negative. And of course other pushers (lenders) will glom on to the new "responsible" debt junkie, too, offering up $20,000 auto loans, more credit cards, "cash-back" credit cards and all the rest of the glittering array of consumer credit "products."

Sure, there will be people who are immune to the bewitchments of easy credit; but they will get their comeuppance when they try to get a mortgage. No way, fool! Either load up on consumer debt or forget qualifying for the mortgage.

Now let's take the "responsible" junkie--and yes, there are plenty of heroin addicts who maintain careers and apparently "normal" lives. In our analogy, the responsible borrower is offered more and more debt at lower and lower rates--until finally (the lender hopes), their "pay every bill off in full every month" discipline finally cracks.

The auto loan at 3.99%--who can resist? The $25,000 credit card limit --who can resist? And once you enter that dark wormhole, the offers get even better: pay off that other credit card balance with a new account with us, for only 3.99%.

This is how the lender-pusher expands the customer base of debt junkies. Responsible borrowers are offered more and more debt at lower and lower rates to encourage their debt habit. It's almost like the Peter Principle: you will be offered more debt until your ability to resist its allure is exceeded.

But fall behind on your payments, and the pushers' "enforcers" will have you by the throat in no time. First, the pushers nail you with exorbidant "late fees" and "over-limit fees." Then ,because you've revealed yourself as a "poor credit risk" (never mind who extended you all that credit in the first place), then your once-low interest rates are dialed up to the maximum.

And even if you've made your payments to Lender 1 on time, Lender 1 will jack up your interest rates because you were late paying Lender 2. This is how the pushers hang together and support the industry objective, which is millions of debt junkies caught in a spiral of ever-higher principal amounts even as they make their monthly payments.

Say the pushers get their hooks in good and deep into a 25-year old debt junkie--if the poor devil is paying rthe monthly minimum. he will pay off his last credit card at 62 years of age or so--some 30 years hence. Talk about a sweet setup for the pushers! Throw in the late fees and other junk fees and the sky-high interest, and the pusher will reap $20,000 pure profit on a $10,000 balance.

And always, the carrot remains just tantalizingly ahead: you need credit to get a mortgage. With no credit, you get a low credit score; and with a low score, you can't get a mortgage. Once you establish credit, then the deals get better and better until that euphoria--of a quick purchase, of a new car, of whatever your heart desires--surges, and the deal is done. You're hooked now on credit, and the addiction cannot be easily revoked.

NOTE: I will be away from my desk until March 3, but will try to post regardless.Email will be read but I may not be able to respond in a timely fashion; my apologies in advance.

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