April 8, 2019

The credit card business is one that everyone wants to be in on, including Apple (the computer guys).  Unfortunately, the banks have a virtual monopoly and make it challenging for anyone else to enter the playground.

Here’s how the business works, in the simplest terms:  Lend someone something that doesn’t exist on terms of repayment that go on ad infinitum such that every four years they double the cost of every purchase made.

What?  Say that again!  O.K. so credit is not what it used to be – the business has boomed and grown like an economic cancer since bank deregulation of the Reagan era.  Credit of all kinds used to be something that was borrowed then repaid, that business model is now ancient history.

The new model is to go into debt, and then further into debt until you are so far in debt you can’t possibly take on any more debt and just hang out there making minimum monthly payments.

Check out your credit card statements, you know – down at the bottom, where it says how long it will take to repay your card using minimum monthly payments – usually anywhere from 28 to 375 years.  The math doesn’t always seem to work though.  As I write, I am looking at a client’s Scotia Bank VISA statement that has the following information:

Balance:  \$8,438.83

Interest Rates:  Cash advances – 27.99%; Purchases 24.99%

Minimum Payment:  \$171.87

Divide \$171.87 by \$8,438.83 and you should find the result to be .020367 – indicating a minimum monthly payment of slightly more than 2% of the outstanding balance.  Even assuming all transactions were purchases at the 24.99% rate, the minimum monthly payment will never be enough to pay down the principal balance.  But, after 48 months an amount of interest equal to the original balance will have been paid.

My spreadsheet shows that after 60 months of payments a new (increased) balance of \$8,455.99 is then due.  If I made an error in my calculations, I’m open to reviewing, but anyway you look at it, this environment of perpetual debt is neither tenable nor sustainable.  The only way out seems to be re-regulation since the banks won’t put a choke hold on their own profits.

We also have bigger economic issues that are too often glossed over, or missed altogether, and certainly not directly the result of bank deregulation.  In the last four decades our spending power has decreased by as much as 40% while taxes have almost doubled but the debt service ratios used by bankers for determining how much debt we can afford to carry has actually increased.