Quick link and comment today. Please see this post at Calculated Risk (which links to a Denver Post article).
My capsule summary:
Sympathetic elderly couple in their 70s and 80s had a pretty nice interest rate on a credit card for years, then it nearly tripled to 16.9% (which still isn’t bad for a credit card). Now the elderly couple’s payment for the coming month has doubled from ~$500 to over $1,000 (the rate change shouldn’t effect the minimum payment for the cards I’m familiar with, so I imagine this has to do with increased amount of interest accrued over the past month under the new interest rate that wasn’t covered by the previous payment). Sadly, as is the case with all these “how can you not feel bad for [old people/single mothers/apple pies] getting charged lots of money by Evil Bailed Out Bank X” stories, the details are sparse so I am left to make these assumptions.
As most cards require something along the lines of a 2.3% minimum payment per month, and assuming his ~$500 payment per month was the minimum (seems likely, considering the increase of his payment), that would mean Mr. Rickman was carrying a $21,000+ balance on the credit card. He indicates he has no salary coming in, so I will assume he’s left with pension and/or retirement investment income. Mr. Rickman also indicates he and his wife “reverse-mortgaged” their home, so it would appear he may have no substantial assets either.
Now no one wants old people to go broke and hungry, even heartless internet bloggers like myself, but to make this a news story is absurd.
Any bank can see the situation clear as day: The client has a growing credit card balance that can never be paid off. They are choosing to keep the balance on this card in particular because it has a very low interest rate. At some point, this client will default and the debt will have to be written off (remember? No liquid assets to recover any of these debts from and its highly unlikely Mr. Rickman would qualify to consolidate with his income and the potential damage his high revolving balance may have caused his credit rating). If Evil Bailed Out Bank X jacks up the interest rate, maybe they can provide incentive for Mr. Rickman to transfer this balance over to another lower interest credit card he might have, or pursue a solution with another bank to take this ticking time bomb off Evil Bailed Out Bank X’s hands. Or, in a worst case scenario, maybe Evil Bailed Out Bank X will cause a default sooner and have to write off a smaller amount of unrecoverable debt than it would be a year or two down the road (when certainly it is unlikely that anything will improve for Mr. Rickman in terms of income or assets).
Shockingly, Calculated Risk actually seems to see things similar to the way I do!
“The interest rate increase is outrageous, but also notice that Mr. Rickman was apparently not paying off his credit card balance every month. I suspect he has been running a fairly large balance compared to his income (only Social Security at this time according to the article), and just making the minimum payment on his credit card. Although the 5.9% interest rate was somewhat reasonable, it is still far more than Rickman could earn on any conservative investment.”
I actually would argue the increase isn’t outrageous (remember, Mr. Rickman’s credit rating may be significantly effected by his high revolving balances, as utilization is the second most important factor effecting his credit score, second only to making/missing payments) and appears to me the logical thing to do from the bank’s end.
And as much turmoil as this may cause Mr. Rickman, the fact of the matter is that Evil Bailed Out Bank X, for better or for worse, allowed Mr. Rickman to live well beyond his means for years now, it would appear if my assumptions on Mr. Rickman’s balances are correct, and it would appear the big loser will be EBOB-X as they’ll be looking at $22,000 of unrecoverable balances, probably far more than EBOB-X would have collected in profit at 5.9% interest over the past 20 years, plus the cost of collections and that last tank of gas it sounds like Mr. Rickman will charge to the card with no intention of paying (I believe the spirit of the law would call that stealing, but hey, the guy’s old).
So whenever it was that Mr. Rickman started accruing large balances on his credit card, he should have been faced with the ultimatum of adjusting his spending or his income to match his lifestyle but EBOB-X allowed him to defer that conundrum. For years, and perhaps decades. Now he is finally forced to face that ultimatum, plus interest compounded, and all he has to do is declare bankruptcy and be debt-free without having much of an impact on his life, if he is able to live without new credit cards.
So what’s the big fucking problem? Mr. Rickman is able to walk away from $22k of debt with minimal consequences. The only source of discomfort noted in the article is that his wife will “miss having the card”.
Boo-fucking-hoo. EBOB-X will miss having $22,000 too. Where’s there tear-jerking article?
[There's a much larger issue of addiction, taking advantage of the innumerate, and financial education... independence... responsibility... and the whole assumption that adults of sound-mind can be trusted to make their own decisions and be responsible for them... but I'm not going to address that here. Like everyone else (see the last paragraph of CR's post), I'm happy to just swing at and not smash open that hornet's nest. Really, I just have to wonder why a family or social group doesn't have one person who is consulted about financial matters when that credit card balance is breaking five-figures. Really. No son, daughter-in-law, good-friend-that-used-to-be-an-accountant that would be happy to provide some free advice? Or do we leave our credit card balances to grow silently in the dark, ashamed to reveal to those around us that we spend 50% more than what we make? Furthermore, is this a problem that exists throughout the world? From what I've read and seen firsthand, the Western world seems to be populated by profligate spenders with comfortable lifestyles and no savings, while the Eastern hemisphere doesn't pay credit card interest.]
MERRY CHRISTMAS!!!… and the cow goes moo
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