Credit cards: the next bailout?

This is the rumbling I keep hearing.  That as more people get laid off, there will be more defaults and the fact that the credit card industry has extended cards to so many people who are bad credit risks, adds to the problem.   According Adam Levitin who write the excellent Credit slips blog (http://www.creditslips.org) in a op-ed carried in a couple papers, any such bailout must recognize the inherent defects in that industry’s current business model.  He identified two major problems.

1.  Interchange fees: this what the $2 fee credit card issuers charge to the merchant for every transaction and the more transactions, the more money for the issuers which encourages them to shower consumers, any consumer with cards so that they will use them and the issuer will rack up the transaction fees.

2.  Securitization of credit card debt.  Much like with the mortgage-back securities market, the credit card issuers have bundled the debt into securities which they’ve sold off to investors.   While the investors bear the burden of the risks of debt defaults, the credit companies skim off the profit on their sneaky increased rate and late fees.

What if we do with the credit card industry what we did with the cigarette companies?  Force them to provide big, clear warnings on all their enticing communications?  And force them to contribute a share of their transaction fee to a fund that will pay for consumers’ credit counseling and bankruptcy filings?  Other ideas are welcomed.

Adam’s piece in the San Diego Tribune

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One Response to “Credit cards: the next bailout?”

  1. Nordstrom’s warning: upscale card defaulters « Reading Tea Leaves by Randy Wilson Says:

    […] I posted about the likelihood that credit card companies might be the next industry with its hat out for […]

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