11 Chapters
Medium 9781576753361

The Credit Card Industry

Karger, Howard Jacob Berrett-Koehler Publishers ePub

Money can’t buy you love, but a credit card can get you started.
–Robert D. Manning, Credit Card Nation

A profound revolution is taking place in the way we are meeting our financial needs. Although it is occurring largely off the radar screen, this change represents a fundamental shift in how a growing number of us access financial services and manage our day-to-day money matters. The basis of this revolution is the widespread expansion of credit.42

Credit is the cornerstone of the modern U.S. economy. We can use it as a cushion for unexpected medical expenses, car repairs, the replacement of an appliance, an emergency family loan, or a trip to visit ailing or dying relatives. It is also a bridge between real household earnings and consumption decisions.1 Credit allows us to purchase products or services immediately, some of which we would otherwise be unable to afford. Payment options are flexible for those of us with good credit, and collateral isn’t required. Middle-class people can purchase goods or borrow cash while they retain their possessions, since loans are secured by the borrower’s creditworthiness. Neither trust nor the presumption of goodwill exists in the fringe economy, however. A low-income or credit-challenged consumer who applies for a loan typically must provide collateral such as a secured bank account, a postdated check, household goods, or a car title.

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Medium 9781576753361

Debt and the Functionally Poor Middle Class

Karger, Howard Jacob Berrett-Koehler Publishers ePub

Debt – the frozen form of stored-up hierarchy. –Rabbi Arthur Waskow, Take Back Your Time

Although the concept of “the middle class” is central to American life, there’s no agreed-upon definition of the term. For example, the U.S. Census Bureau has no official income classification for the middle class.1 Consequently, the middle class has come to represent a large portion of the population ranging from those with incomes at 200% of the federal poverty level to those in the nation’s top 5% of income earners.30

Some policy analysts classify households with a total annual income between $40,000 and $140,000 as middle class, while others categorize the middle class as having an annual income between $25,000 and $75,000. Still others use an annual income of $50,000 as a benchmark.2 To complicate matters, middle-class incomes are not adjusted geographically or by an urban/rural designation. In short, the term “middle class” is virtually meaningless given the enormous income spread. For the purposes of this chapter, the middle class is defined as households with a yearly pretax income of between $25,000 and $75,000—a group that occupies about the middle half of the Census income-distribution tables.3

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Medium 9781576753361

The Getting-Out-of-Debt Industry

Karger, Howard Jacob Berrett-Koehler Publishers ePub

Born of people’s misfortunes, credit counseling was a sleepy cottage industry for a long time. Now, larger and troubled, it may be more in need than its clients of being set back on the straight and narrow.
–Christopher H. Schmitt with Heather Timmons and John Cady, “A Debt Trap for the Unwary,” BusinessWeek, October 29, 2001

We are besieged by advertising on two fronts: how to get more and cheaper credit, and how to get out of debt. On the one hand, we are lured into taking on more debt through cheap credit; on the other hand, we’re warned of being in too much debt.174

Federal Reserve chairman Alan Greenspan pointed out in 2004 that because of low interest rates, we could more easily handle high levels of personal debt.1 In 2003 economics journalist Robert Samuelson argued that Americans were already too heavily in debt and the last thing we needed was more “cheap credit.”2 Despite Greenspan’s insouciance, “cheap credit” still mounts up and must be paid off. For instance, since 2001 U.S. households have spent more than 13% of their disposable income on debt, a level not seen since the Fed began collecting this data in 1980.3 The contradictory messages of “borrow more” and “borrow less” reflect the simultaneous growth of the credit and getting-out-of-debt industries. This chapter examines the consumer credit counseling industry, debt settlement, and ways to rein in runaway credit counseling agencies.

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What Can Be Done to Control the Fringe Economy?

Karger, Howard Jacob Berrett-Koehler Publishers ePub

Qui non improbat, aprobat.
(Who does not blame, approves.)

What was once a loose medley of family-owned pawnshops, used-car lots, neighborhood lenders, and small-time real estate speculators has evolved into an industry dominated by large corporations with revenues in the billions. Despite staking out different sectors of the fringe economy, all fringe businesses share a common goal: to extract the maximum amount of money possible from each customer.198

Fringe businesses are connected to each other by their predatory relationship to consumers and communities. Specifically, in the fringe economy, customers make interest payments but receive no benefit from them. I know of no transaction in which consumers receive any interest compensation from a fringe economy corporation. Capital in the fringe economy flows in only one direction—from the pockets of consumers to industry coffers. Unlike mainstream financial institutions that allow customers to save money or invest, the fringe economy offers no investment services or financial products that lead to asset growth or increased household and community wealth. This feature alone marks the fringe economy as predatory. In the final analysis, the fringe economy preys upon society’s most vulnerable members by charging them more for goods and financial services than it does the middle class, both in absolute dollars and relative to their income.1

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Alternative Services: Check Cashers, the Rent-to-Own Industry, and Telecommunications

Karger, Howard Jacob Berrett-Koehler Publishers ePub

The millions who are poor in the United States tend to become increasingly invisible. Here is a great mass of people, yet it takes an effort of the intellect and will even to see them.
–Michael Harrington, The Other America

A robust and growing industry has emerged in America for those with bad or no credit. Most services, such as telecommunications, apartment rentals, and store credit cards, require a credit check. Those who score low on this check are forced into the alternative services sector. This chapter examines how America’s down-and-out are shortchanged through expensive alternative services, such as furniture and appliance rentals and telecommunications.88

ACE Cash Express, Check ‘n Go, Mr. Payroll (Cash America International), Dollar, and Money Mart are familiar sights in inner-city neighborhoods and strip malls. Behind these 14,000-plus storefronts lies an industry that cashed upwards of 180 million checks in 2001 with a face value of $55 billion. These check-cashing outlets (CCOs) generate nearly $1.5 billion a year in revenues, coming largely from the 20%–40% of the unbanked who regularly use these services to cash their paychecks.2

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