Ruthless Defaults on Credit Cards

Banks are trying to recoup some of their massive losses on bad loans by increasing their rates on credit cards and collecting huge overdraft fees on people who use debit cards and pull too much out.  There is an interesting article in today’s New York Times on debit card overdrafts.

However, what got my attention was the YouTube video below by a woman protesting the increase in credit card rates by Bank of America (BAC - Analyst Report). Essentially she is telling the bank that she is going to ruthlessly default, unless they return her card rate to its previous level (not stated, from the new rate of over 30%). The YouTube clip can be seen here.

While I found much of her rhetoric over the top, she is making a very good point. The costs of the colossal screw-up by the banks are being borne by the middle class, both through eventual higher taxes to pay for the bank bailouts, or through higher fees and expenses when we use the banking system. With banks generally not lending freely, your credit score is less valuable than it used to be, so simply refusing to pay your credit card bill will not hurt as much as it once might have.

Scenarios such as this could lead to many more serious problems in the banking sector. The banks mostly rely on a system of voluntary compliance, where people simply pay their bills on time with nothing more than a statement or invoice being sent out each month.

The person in the video claims that she has the ability to pay, but she simply is deciding not to. If her attitude becomes widespread, the banks are going to be in a tough spot. They already have their hands full with people who would like to be able to pay their bills, but simply are unable to because they have been out of work for a long time.

In previous times, the attitude of her neighbors towards her would be that she was just one step removed from being a thief. However, after seeing the kid-glove treatment that the banks have gotten under both the Bush and Obama Administrations after they had behaved very badly, and seeing the enormous clout that the banking lobby has in Congress, people may feel that this is the only way they have of fighting back.

The U.S. is not France, we don’t do general strikes. The usual political routes have failed. BofA just happened to be the bank that this person was using, but it is far from unique, all the major card companies such as American Express (AXP - Analyst Report), JP Morgan (JPM - Analyst Report) and Capital One (COF - Analyst Report) have been engaging in similar practices and could be at risk.

This could be the start of a quiet rebellion, but one that could ultimately be more effective at curbing the banks than any sort of manning the barricades or letter writing campaign to congressmen. The civil courts are going to be overwhelmed if this takes hold.

Consumer credit might end up contracting not because people are paying off their credit cards, but because they are not. Default reduces the volume of debt outstanding just as much as repayment does, but with very different winners and losers.

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