I’ve written about debt and credit cards before, but this video, ‘Maxed Out’, is one of the best for explaining the predatory tactics of the bank and credit companies. Yes, people are at least partly to blame for getting into debt, but they are at the same time being tricked into taking on debts that are deliberately structured so as to be very hard if not impossible to pay off. Taking on credit card debts is like being a hapless dinosaur walking into the La Brea Tar Pits. I’ll summarise some of the tricks below, but first, here is the video.
Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders [Exerpts Only]
OK. So, to the tricks. It would be possible to write volumes on this subject, but a blog is not the place for it so I’ll try to be brief. Some of the tricks are blatant and obvious, and some are subtle and maybe even accidental to some degree.
First, a subtle one (not entirely accidental either: watch the videos on ‘The Century of the Self‘ to see why). The companies, the media and the government collude to promote the idea of a consumer-spending-based society: a fantasy lifestyle is promoted throughout the media and commercial worlds, to such an extent that citizens in the West typically end up feeling practically entitled to the ‘good life’. That feeling of entitlement runs deep and sits there in full form just beneath the surface in most people. And it causes massive overspending on endless junk and entertainment that people, in fact, do not actually need. Except in their heads. And that’s enough.
When the economic times are good, and regulation is going through one of its regular slack periods, people can take out large loans based on the ‘equity’ in their homes, and use that as they please. The debt gets added to what’s owed on the house, but when prices are rising rapidly this can be easily covered over a few years from the rising value of the property: the idea is if you get stuck, you can sell the house at a profit anyway. But when the market turns, as it always does eventually… houses get repossessed because the owners can’t or won’t sell them or they owe more on them than they are worth because the values have dropped.
This is a general pattern with lending, and not just on homes. It applies to bank loans, credit card loans and other so-called ‘unsecured’ lending (loans not based on your home or other large asset, generally). When interest rates are low, or inflation is high, it is usually possible to borrow easily. Then the screws tighten: maybe interest rates skyrocket from 2% to 20%. Maybe unemployment goes up massively. Whatever. The upshot is the banks get to seize a load of property from people who owe them money. This cycle happens 1-6 times over a normal human lifetime, roughly: once or twice massively (as at the time of writing), a few more times in a smaller wave.
The credit card companies and banks charge very high over-limit or overdraught fees, and high late payment fees. If you go over limit or are late paying, they often also exercise the right stated in their small print to increase your interest rates. They will also sometimes do this if you have been late or over limit to another lender. These companies make very big profits from delinquent customers as a result.
If they can’t get you with late/over-limit fees, the next best thing for them is for you to pay the minimum payment each month, forever, or for as long as possible. Customers who pay off their debts every month are worthless to them. So guess what? The poorest customers, that is, those most likely to be unable to pay everything off every month, are their most profitable customers (as a group). Big financial institutions finance these ‘payday loan’ shops you must have seen springing up like Japanese Knotweed all over the place in recent years. Why? Because those businesses specialise in lending to this customer group…
Bank staff are trained not in banking, but in sales.
When a customer starts struggling with their payments, the above charges and any others they companies can think of are quickly added to the debt. In the course of even just a few months a relatively small debt can be multiplied many times over by the charges. Finally the customer is driven over the edge and liquidates their assets, declares bankruptcy, or something similar. The bank gets the assets (approximately). They don’t care about the actual debt: the debt plus charges was the target all along. As soon as you show financial weakness they will pile on the charges and, in effect, take everything they can before you can stop them.
Big name banking institutions, pillars of the community, world famous names: these are among the worst, the most piratical. Don’t think that a famous high-street name will be honorable. They will not be, when the chips are falling in their favour as described above. They have all contributed to the way the laws are written; those laws allow their practices.
When customers try to re-finance loans, or consolidate loans, that is, trade-in their old loan with high payments for a new one with different terms and hopefully lower payments (the commonest type), it is not necessarily the case that those customers are given a good deal, or even a better deal. Maybe the payments will go down from £500 a month to £450 a month. Probably £250 would have been possible. Maybe the interest rate will go down from 25% to 20%. Sound good? But maybe the monthly payment will have gone down so much that over the long run of the loan, you’ll end up paying more interest overall. Whichever way you try it, there’s an angle for them… watch out. Do your own maths, carefully.
The banks target students in further education preferentially. Firstly, they are away from home for the first time and are easy prey for overspending. Secondly, those that evade that trap can become long-term ‘lifestyle’ customers who think that having some credit cards is normal and OK. And being future graduates, they could be high earners too. Good future customers for lifestyle loans for cars, houses, etc. Not many of them in the modern world will manage to keep enough of a surplus to save up instead of borrowing their way through life, unfortunately.
They keep offering more credit cards, more loans, more financial products… most if not all of which you can, in fact, do without.
They keep raising their customers’ credit limits, so they can borrow more, and more, and more… and have to keep working harder and harder and harder to keep up with it all.
Another subtle trick that is widespread in society: blame the debtor. But… isn’t it the debtor’s fault if they borrow all this money they can’t afford? Well, is it? Go back and look at some of those techniques described above, and see if they are fair. Is it fair to lend to students who’ve just left home? Is it fair to promote a high-spending lifestyle to people who know no better? Is it fair to cycle interest rates down and up, and to pile on charges the minute someone slips a little?
When someone gets into financial trouble, you don’t have to look far to hear or see someone using the ‘righteous indignation’ voice against them: “Just how do you propose to pay back this money that you owe?” Or, “How do you propose to take responsibility for your debt?” What is this? Are they reasonable, taking into account the sly tricks used to get people to borrow more than they can afford? I don’t think so. Debtors should not fall for this voice. It is the voice of sado-masochism, and it leaps out the minute such people think there is a possible victim in front of them. If you refuse to cringe, the sadist will look elsewhere for his meat. Read The Fear of Freedom (Routledge Classics) if you want a psychologist’s portrait of such people. For now, just be clear in your own mind that it is not your fault if the law allows these piratical financiers to rip you off. Sure, you made mistakes. Everyone does, many times throughout their lives, in different ways. But making mistakes doesn’t make it OK to trick you; to knowingly lend you more than you will realistically be able to repay in a reasonable time, at a reasonable rate. You have some responsibility. But don’t shoulder the entire blame. Two-thirds or more of the interest and charges are part of the scam and are nothing to do with you.
One last point. I mentioned that the laws allow this kind of rip-off. There was a case in point on the news recently. A company is sponsoring free travel on the London Underground on New Year’s Eve. That company is a loan company. In the attached picture, you will see that the “typical APR” (Annual Percentage Rate) is 2689%… yes, two thousand six hundred and eighty-nine percent per year.
When asked about it, the voice of the government authorities, on this occasion London Mayor Boris Johnson, said that they were a legitimate company regulated by the Financial Services Authority. So that’s all right then.
And it is. Officially. So look after yourself, because the government does not. And this applies just as much in other countries as in the UK.