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I don't think the lenders were being terribly irrational. Credit-card issuers make their profits from interest and late fees. If a customer racks up a large b
by sethg 18y ago
I don't think the lenders were being terribly irrational. Credit-card issuers make their profits from interest and late fees. If a customer racks up a large balance on a card, makes only the minimum payment for years and years, and then defaults, the credit-card issuer will walk away with a net profit, even if it has to write off the principal of the original loan. And usually customers in this situation can be squeezed for quite a while before they default.
One simple way to ameliorate the problem in the future would be to require every credit-card statement to include a warning: "If you do not borrow any more on this card and make only the minimum payment every month, it will take you ____ months to repay your debt completely." Such a requirement was considered when Congress amended the bankruptcy code a few years back, but the bank-industry lobbyists kept it out of the final bill. That should tell you how much the banks wanted their customers to be fiscally responsible.
- Retric 18y agoDon't forget a 25% default rate per year can still be cash flow positive when they are charging a 29% interest rate and adding on other fees.
- Retric 18y agoJust adding the math for those who might have missed my point. If 3/4 of people avoid default the rest don't so .75 * 1.28 = .9675 which is less than 1, but the 25% that fail don't all fail on the first day so they are probably going to average ~6 months of payments so .25 * .5 * .29 + .9675 = 1.00375 which is larger than 1. Add in some fee's and whatever principle people payed back before defaulting and you are making money. Next year some people that made it this year will fail but your adding some people to make up for those that defaulted last year. In the end you need people to average 4 years before defaulting which I suspect is normal.
- sethg 18y agonods And until the card issuer officially writes down the debt, the principal that the borrower owes to the issuer is counted as an asset on the issuer's balance sheet.
- Retric 18y agoYep, but they don't write down all of that debt they first charge insane late fee's and interest for a few months and then sell that highly inflated debt to a collection agency or package up that debt before it defaults and sell that to wall street.
- jimbokun 18y ago"If you do not borrow any more on this card and make only the minimum payment every month, it will take you ____ months to repay your debt completely." Make sure to specify that it appears on the first page. In large letters. I'm sure there is a ton of useful information buried in the pages of very small type that come with each statement. Good luck figuring out which parts are important and comprehending the legalese.