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URL:  http://boards.fool.com/well-heres-an-idea-why-cant-credit-card-19619872.aspx

Subject:  Re: Credit Card Debt up 53% Date:  9/23/2003  6:38 PM
Author:  AngryGeek Number:  170241 of 312033

Well, here's an idea. Why can't credit card companies step in to help those who are relying on plastic to survive. Here's my proposal:

Credit card companies should offer people who can provide proof of need the ability to purchase necessities like food, medicine, healthcare and the like on plastic as very low, or 0% interest, as long as payments are always made on time. These companies would still benefit by receiving the amount they always do from the merchant, but would just forgo the added interest income. This would not only create goodwill for the companies, it would be a huge boon to those in need.

And why not?


Banks are in the business of making money for their stockholders not in providing charity loans for those who are already at risk of default. The reason that these people can't get better interest rates is because they are a bad risk. Sure some of these distressed borrowers will use the money to right themselves. But many of them will default, and the bank will not be able to use the higher rates charged to this group as a whole to compensate the company for the lost revenue when consumers default on their debts.

I wouldn't invest in a company that had a large program like the one you are proposing. The good will couldn't compensate for the lost revenues.

One of the principals of investing is that the only way to compensate for increased risk is with the promise of higher returns. Hence risky borrowers are charged higher rates. If there really was a market for charging these borrowers a lower rate, then some company would find a way to undercut the competition and make a fortune. If a person can't find a way to get a lower interest rate from another bank, the chances are very high that they are being charged the market value of their loan.

Think of it this way. Grocery stores in distressed neighborhoods charge higher prices. The store owners aren't charging more out of spite. The stores need a higher profit in order to pay for increased security costs associated with an environment that has high rates of crime and vandalism. And if the store's prices really were too high, someone would open another business that would take away business from the high priced store.

The reality is that banks aren't vultures. Credit card issuers respond to the same laws of supply and demand that every other business in the country follow. And the bigger message is that charity can't solve poverty. These distressed borrowers are bad off because of poor choices that they have made. Subsidizing those choices by offering them artificially low interst rates is not going to give them any incentive to change their self-defeating behavior.

Angry Geek

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