Cash or Card?

A phrase that is commonly said in the super markets is “paper or plastic”. In today’s society, however; it is not talking about bags. They are referring to the type of payment that you will use to pay for your goods and services. Paper refers to actual money, like cash. Plastic is credit and debit cards that are used more frequently as our country advances. Along with credit cards comes debt (if you are not “responsible” with your money.). Debt in the United States is a growing fad that unfortunately plagues our country more and more each day.

People who are unable to pay back their bills are forced into bankruptcy as money gets tight. They elect to let the government “wipe their slate clean” for ten or seven years in return for a new start. This is a misconception. Bankruptcy is not a new beginning but a virus to your lifestyle. In this paper you will see how credit card debt, bankruptcy and other elements affect our economy and why it is in the shape that it is in now.

What exactly is credit card debt? This is a frequently asked question that typically does not have a solid answer. Basically, though, debt (of any kind, whether it is credit card related or not) is money that you owe to a person or company. If you have a retail credit card and charge on it to get a discount, it is a debt that you owe to that particular store. People charge for all kinds of different reasons. They charge for gas, groceries, travel and other luxuries that they may otherwise not be able to pay for up front. Gas prices, as you will see later on in this paper, is a big factor to credit card debt, especially with in the last two years. Another question that arises when you talk about credit card debt is who can have it? Anybody who has a credit card can be in debt. The way they handle their money determines whether they will actually be in debt or not. If you own a credit card with a balance and do not pay it off when it is due or just pay the minimum payment each month, you will have debt. The amount that one owes is strictly up to that person. If you charge on a credit card and keep charging and only pay the minimum payment, you will dig yourself a hole that you are unable to dig yourself out of.

For example: (keep in mind that this does not apply to everyone who owns a credit card) Someone makes a purchase of $300.00 on a charge card when they could only afford about fifty dollars of that purchase to begin with. When the payment is due, they only pay the minimum amount due (about 2% of the amount owed. [T.I.L.A]). After the payment, a finance charge is computed into the amount that is left over. This is calculated with an interest rate or APR. The APR, or annual percentage rate, of a credit card varies anywhere from 0% to 28.99%. (Discover). This means that if you owe $250.00 and you have an interest rate of 17.99%, you current balance would be $253.75. That’s an extra $3.75 that you didn’t even charge that you would have to pay. The finance charge is how credit card companies make their money. Say you made a payment of twenty-five dollars, and your finance charge was $3.50, only $21.50 would actually go towards your balance on your credit card. The problem with this is that even though they have a balance, people keep charging. It is said from various news sources that this may be to blame because of the rising costs of groceries and gas, as well as other luxuries.

Another question that is frequently asked is how does credit cards affect the economy? Credit cards usually go unnoticed, but recently; they have been making a huge impact on the way people spend their money. Like what was stated before, if people do not pay off their credit cards, it will be detrimental to the economy. Big companies
not getting back the money that they loaned out which takes quite a hit to their own wallet’s. If they do not get the money back they cannot stay in business which means no jobs for their employees. They are no longer able to pay them or keep their business a float. This means that people are not getting paid and in return they cannot purchase items that they would when they had a job.

The role of credit cards in the economy is really rather simple. Dr. Robert Cole, Professor of Marketing at the University of Nebraska – Lincoln stated that “Rather than pay cash, either because of greater convenience or because of necessity , many consumers will satisfy their material needs by use of their credit for goods and services. Retailers then are holders of consumer credit, and in turn they finance their inventories and other working capital needs by using their business credit”. So basically one can deduct the fact that consumers who buy with a credit card are buying their merchandise on their word, rather than with cash, to pay back their credit to the retailer who sold them the item(s). Also they are obligating themselves to pay back the credit card company (whether it is a major credit card holder or a retail credit card) the debt that they now owe to that certain company. To really understand that role, you have to, first, understand a little history about credit cards. 1946 was really the beginning of credit cards in the United States. The Flatbush National Bank got its start on credit cards in Brooklyn, N.Y. They introduced the first credit cards ever in this year. 1958 was a start of an epidemic.

That was the beginning of American Express, Chase Manhattan Bank of New York
(which later became Visa) and the Bank of America credit cards.

Two years later in 1960, Senator Paul Douglas brought forth the Truth-In-Lending Act, also known as the T.I.L.A. Basically, this act stated that credit card companies were required to issue disclosures of APR’s (annual percentage rates), fees, and finance charges. To state its exact words, the purpose of the act was to “…promote the informed use of consumer credit by requiring disclosures about its [the company’s] terms and costs…also gives [consumers] the right to cancel certain credit transactions that involve a lien [or collateral; which is something, like your house or your car, that you put on your loan in case you stop making your payments. The bank or credit union has the right to repossess your collateral if that happens] on a consumers principal dwelling…” It also stated many important things about finance charges, which will later be discussed in this paper.

Moving forward ten years to 1970, Congress banned credit card issuers from mailing unsolicited credit cards as marketing. They also prohibited the companies from discriminating on gender and marital status. In the 80’s, companies moved their center of operations to Delaware and South Dakota. Two states that will not cap interest rates. Also in the 80’s, “Congress required all credit card promotional material to prominently display a standardized list of a card’s terms, including annual fees, and annual interest, late-payment and cash-advance fees in legible type.” (CQ researcher). However, in 1991, a bill that would have capped interest rates at fourteen percent, failed. Unfortunately for consumers, credit card companies protested and got their way. The amount of offers (“junk mail” that you receive from credit card companies asking you as a consumer to sign up for their credit cards) that the companies sent out rose from 1.52 billion in 1993 to over 5 billion in 2001. That is a thirty percent raise in 8 years.

In 2004, fees and other charges accounted for over $24 billion dollars in income and revenues for the credit card companies. Two years later in 2006, when home-equity loans dried up, credit card debt began to be a popular thing. People wanted to “keep up with the Jones’ ” and charged their new car on their credit card, knowing they wouldn’t be able to pay it back. And last year, Congress passed the Credit Card-holders’ Bill of Rights. It was supposed to prohibit practices such as raising interest rates without notice or imposing late fees on people who paid their bills on the due date. Also in 2008, credit card debt, according to CQ researcher, “reaches[ed] a record high of $1 trillion.”

You can almost always assume, in today’s age, that with outstanding credit card debt, bankruptcy will follow. What is bankruptcy? You may ask. Well Dave Ramsey,

author of several financial aid books, says that “Bankruptcy is a process established by a set of federal laws that are designed to give debtors a ‘fresh start’ by canceling many of their debts through an order of the court.” It also allows the companies or banks who lent you money a chance to get their “…designated share of any money that debtors can afford to, or are obligated to, pay back.” (Ramsey, Dave). There are two chapters in which you can file: Chapters seven and thirteen. Chapter seven bankruptcy is total liquidation of your credit card and other debts. Under chapter 7 they can also sell some of your possessions in order to pay back your debt. Some things that are exempt include: cars, work-related tools, and basic household furnishings. Everything else is fair game. This stays on your credit report for ten years. You are also obligated to forfeit any and all credit cards for this period of time. Chapter 13 bankruptcy is a little different. This “…may be the preferred method for consumers with assets they don’t want to lose, and willing to retire as much of their debts as possible, but under a less-pressured structure. Some debt balances may be partially discharged, and their filer agrees to a monthly payment to the trustee for distribution to the remaining creditors. Any bankruptcy is a serious mark against your credit record, but Chapter 13 filings may be perceived as slightly less serious than Chapter 7 filings since you are exhibiting an interest in retiring your debts.” (Ramsey, Dave). If you must file for bankruptcy, Mr. Ramsey suggests that you file under chapter 7 and not chapter 13. The way to file for bankruptcy is simple. All you have to do is go to a bankruptcy court and file under either chapters (which were already discussed). The economy suffers because of bankruptcy. Unemployment, unfortunately, seems to be a popular thing nowadays. Since there are no jobs for people to work, they cannot pay their bills as a result. Let alone go out and purchase other necessities.

Other complications besides debt and bankruptcy are over-the-limit spenders. What does it hurts if I spend over my limit, you may ask. Well not only does it hurt your credit score, which is a crucial part of life, it also hurts your chances if you want to apply for another credit card or loan in the future. Creditors are cracking down on consumers in this tough economic time. They do not want to lend people money who is 1. Not going to pay it back and 2. Spend over the limit that was given.

Late Payments are also a big hassle to credit card companies. So to keep people from doing this, they slap on a late payment fee. According to Bankrate.com, late fees are based on a customer’s card balance. They state that balances less than $100 for customers with MBNA America and Discover will pay a fifteen dollar fee for tardy payments. For balances greater than $1,000; a fee of $35 will be charged for late payments. Which, to date, is the highest late payment fee around. Anything between $100 and $1,000 will be charged $25. “Industry analysts say charging customers with higher balances higher late fees makes a lot of sense. A card company takes a pretty big financial hit if a customer, with say, a $5000 balances stops paying altogether.” (Bankrate.com) According to R.K. Hammer, President of R.K. hammer Investment Bankers in Thousand Oaks, California “With high balances, there’s a greater risk, therefore, it’s a smart business decision.” He also goes on to say that “Penalties boost profits”. On the flip side, Brad Dakake, a consumer advocate at Massachusetts Public Interest Research Group says, “The fees are way out of control. They’re not being done to penalize customers that miss a payment. They’re being done to maximize profits.” How do late payments affect the economy? Well the percentage of late fees for credit cards rose by seven percent in 2002. (Survey by consumer action) So based on this information, you tell me.

To understand today’s economy; you have to understand past recessions. To discuss all of the recessions of the past would take up enough space for a book so the recession of the 1980’s is all that will be conversed about in this paper. In the 1980’s, the amount of bankruptcies from 1981 to 1982 rose 50%. (About.com). Not only was the banks hit hard with this but agriculture as well. Exports declined, crop prices fell and interest rates rose. “By 1983, inflation [higher prices, an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money] had eased, and the economy had rebounded, and the United States began a sustained period of economic growth.” (About.com). The American people were fed up with President Carter’s political views and elected Ronald Reagan as President of the United States in 1981 (he served until 1989).

He believed in supply-side economics, which is an “…economic theory which holds [temporary unavailability of specific sums in a bank account to the accountholder.] that reducing tax rates, especially for businesses and wealthy individuals, stimulates savings and investment for the benefit of everyone. It is also called trickle-down economics.” (Investorwords.com). His theory, based on the supply-side economic theory, stated that lowering taxes would persuade people to work harder and longer. In which, he thought, would lead to excessive saving and more investing, therefore resulting in production growth as well as overall economic growth. Even though his tax breaks were directed at the wealthy, he thought that that would induce higher investment which would provide more job opportunities as well as higher wages. His plan worked and brought more jobs to the nation which in return had people spending more money, seeing as they had more of it to save and spend.

Some would say that the current economic crisis started by big company greed. Which is true, but that’s not the whole story. Have you heard of “Mortgage back Security”? First of all, what is a security? A security is an instrument of financial value like stocks and bonds. A mortgage back security is a bunch of mortgage loans that are grouped together to create a large pool of debt. It is then sold to investors the same way a bond is sold. Basically, when large companies need money they sell parts of their company. Which is the bond that, you, the consumer buys. Also “Bonds are a form of indebtedness sold to the public in set increments, normally in the neighborhood of $1000.

In return for lending the debtor the money, the lender gets a piece of paper that stipulates how much was lent, what the agreed-upon interest rate is, how often interest will be paid and how long the term of the loan will be.”(Fool.com) But back to the mortgage backed securities, you buy them at discount rates and rely on the mortgage payments for the difference. It is supposed to be safe because people wind up paying way more than what they borrowed thanks to the crazy interest rates that are slapped on them. The one thing that investors didn’t count on was the fact that people were unable to pay their mortgage payments because the payments, along with the interest rates, were so high.

Several other factors are also to blame for the present financial calamity. Oil prices are also a big factor when we talk about the economy. Last year all you heard was questions like “Will the gas prices ever drop?” and “Are they trying to kill us?” Gas and oil prices reached its peak at over four dollars a gallon last year causing families to rethink their annual Florida vacations to maybe a local fair instead. People just could not afford to even go to work to make the money they needed to pay for the gas to begin with. This made it very difficult for people to have extra money to spend and save. It also made it hard for people to pay their bills like credit cards bills. They were unable to financially support their buying habits and consequently were unable to pay the said credit card bills.

People relied on their credit cards to pay for gas, groceries and other luxuries that they wanted and needed. Also as gas and oil prices skyrocketed, people started to lose their jobs, as well as their minds, because of the lack of cash flow through their homes. Companies were losing money because of the lack of money that was coming in from sales. This made them unable to pay employees and so in return had to lay off people. It didn’t matter to them that you had been with the company for two years or thirty-five years. Some reasoning behind the sky high prices is due in part to the fact that paper money no longer is worth was it was ten years ago. The government just does not have the gold and silver to back it up. Needless to say, it costs more to make that dollar bill in your pocket that what the darn thing is actually worth.

Although credit cards are not completely to blame for the current economic catastrophe, they are partially responsible for the “economic maelstrom” (Wasik, John F.) we seem to find ourselves in. The things that you have to be careful of are spending more
than you can afford. Credit cards can be a good thing if you can keep them paid off. For one, they can raise your credit score. This is detrimental when you want to get a loan to buy a car or a home for your family. If you do find yourself in the debt crevice, there are several websites available to help you plan your payments to get rid of that nasty card debt you’ve been carrying around. Just simply type in “Debt Calculator” into your favorite search engine like Google and about 800,000 sites will pop up at your convenience.

Essentially, it all boils down to the fact that credit card companies manipulated you into getting their cards. They wave things like 5% cash back bonus and 0% interest in your face to rope you into creating an account with them. What you do with them after you’re signed up is your business but the question is what will you do with them once you have one? Will you be the one who digs a hole so immense that you are financially unable to dig yourself out? Or are you a “responsible” consumer? That, you will have to decide for yourself.

Works Cited
1. “The higher the balance, the higher the late fee”
By Lucy Lazarony
http://www.bankrate.com/brm/news/cc/20020408a.asp

2. “What credit card companies don’t want you to know”
By David Bach
http://www.finance.yahoo.com/expert/article/millionaire/26303

3. Federal Deposit Insurance Corporation (FDIC)
http://www.fdic.gov/regulations/laws/rules/6500-1400.html

4. “Discover the power of the truth in lending act”
By Bank Fraud Victim Center
http://www.mortage-home-loan-bank fraud.com/manual.htm#table%20of20contens

5. US Security and Exchange Commission
“SEC actions during turmoil in credit markets”
http://www.sec.gov/news/press/sec-actions.htm

6. INTERVIEW with two anonymous people at the discover customer service center in Delaware.

7. “Five Ways to Recoup Your Losses in Age of Obama: John F. Wasik”
By John F. Wasik
http://www.bloomberg.com/apps/news?pid+newsarchive&sid+aZ.CxohPLXRk

8. Consumer and Commercial Credit Management
Cole, Robert H.; Ph.D.; Professor of Marketing, University of Nebraska-Lincoln
Fifth Edition 1976© Richard Irwin, Inc.

9. Philadelphia Business Journal
“Local lawyers Lose Supreme Court Battle on Bank Fees”
By Carol Patton
http://www.bizjournals.com/philadephia/stories/1996/10/07/focus.html

10. CQ Researcher
October 10, 2008 p. 827

11. CQ Researcher
October 31, 2008 p.833
12. Wall Street Journal
October 31, 2008; Vol. CCLII No. 104, p.B1
“Slow Payments Squeeze Small-Business Owners”
By Kelly K. Spors and Simona Covel

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