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Author: AngryGeek One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308519  
Subject: Re: Credit Card Debt up 53% Date: 9/23/2003 8:22 PM
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What I'm suggesting is that there are segments of our population whom through no fault of their own find themselves in dire situations and could use assistance. The elderly, for example, whom must often choose between food and medical care/prescriptions.

Agreed

Our government has avenues of assistance paid for by the rest of society. In my scenario, large, for-profit institutions would be able to give something back without causing damage to their bottom line.

I think that this would have a tremendous impact on the bottom line for several reasons.

1) Just because these people are poor through no fault of their own does not make them a good risk. Their economic situation defines them as a bad risk. Companies would be taking on bad loans without any increased profit to compensate the company for the increased risk.

2) Investment capital is finite. And since it is finite the corporation is choosing to give low interest loans to financially distressed individuals at the cost of other uses of that investment capital. Other uses that are almost certainly more profitable than low interest, high risk loans.

3) These charity loans would be competing with the high risk loans that credit card issuers currently make available to distressed borrowers. So in addition to losing money on the charity loans, the company would be destroying the profit in the high risk, high interest loan market.

4) Interest rates would have to be raised for all other consumers. Distressed borrowers are going to default more than financially solvent borrowers. That risk would not be compensated for in the charity loans, so it would have to be socialized among all the banks borrowers. To a degree this happens anyway, but the increased rates for distressed borrowers helps prevent too much of the cost being unloaded on consumers with good credit. Increased costs (in this case in the form of higher interest rates) inevitably has an effect on demand. So the charity loans are likely to have an impact on all of the bank's credit card business not just the distressed loans portion.

Angry Geek





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