The Economic Slavery Model: Why Banks Profit from Financial Distress

The problem with the new system of credit is that the more in-debt a person goes, the more offers for credit they get. ...It's all about risk. Those individuals who have bad credit or have debt are riskier customers. However, those customers can be charged higher interest rates because they are “so risky.” So, garnishing "high risk" interest from individuals with poor credit is how the banking industry makes its money...

Long-time customers of credit card companies pay off their cards every month, on time, for years, but then fall behind on their payment once, and the bank immediately raises the rate to the normal 25% APR. There are millions of dissatisfied customers due to this reality. 

When an individual misses a payment, makes only a partial payment, or their credit rating drops s/he will get more offers for credit. But those who are behind on their bills, short on cash, or down on their luck join the industry's most profitable customers. It’s banking economics; credit issuers make the most money off of those who are strapped for cash, and it shows. 

(Source)

"More than 75 percent of credit card profits come from people who make those low, minimum monthly payments. And who makes minimum monthly payment at 26 percent interest? Who pays late fees, overbalance charges, and cash advance premiums? Families that can barely make ends meet, households precariously balanced between lending industry, barraged with special offers, personalized advertisements, and home phone calls, all with one objective in mind: get them to borrow more money." 1

America's banking economic model should read "ONLY CHARGE THOSE who can’t afford to sustain themselves," which is the reverse activity of banks a generation ago. If banks were no longer able to charge exorbitantly large interest rates, they would no longer be able to profit from those in financial trouble. The old approach was to lend money to only those who could afford to pay it back--and not string payments out as long as possible. Banks used to be unable to change interest rates when payment was late, and late fees were much less than what they are today. 

The current American banking model effectively creates economic slavery where Americans are indebted or slaves to their bankers. This really became apparent when considering 2005's change in bankruptcy regulation. 

"This year [2003] credit card companies will charge more than $7 billion in late fees (quadruple what they charged less than ten years ago). [Bankers] wouldn’t have dreamed of telling those families that with compounded interest at the new rates and special overbalance fees and late-payment penalties, they now owed $4,000 for their original $800 purchase." 2

The argument is often made that "nobody is holding a gun to customers’ heads and forcing them to put money on their credit cards." But the fact is that the vast majority of individuals do not want to rack up high credit card debt; they must to get by in the ever-increasingly hazardous American economic system. Such an argument may have had some validity if there was a level playing field between buyers and lenders, but there isn't. 

Check out the Why are so many Americans in debt? blog post for more. 

There is no training for financial responsibility in classrooms today, and honest banking practices are not being performed either. Customers do not have the appropriate information to know what they are getting themselves into. “If the market were working properly, how could Citibank sell 40 percent of its high-priced subprime mortgages to families with good credit who would have qualified for low-cost mortgages?” 3

Banking interests often cite how the market would decline if restrictions were imposed. They say this like it is a bad thing... A generation ago, banks used to work for the people; people didn’t work for the bank. The government regulates millions of products, from the paint the Chinese can put on toys to the safety regulations on cars. Saying America shouldn’t regulate the banking industry is like stating they shouldn’t regulate all useful products that are potentially dangerous. 

"Consider the toaster. People buy toasters for home use. No one makes them buy toasters, and they could live without toasters. If they understood electrical engineering, they could evaluate the safety of each toaster under every possible scenario. But toasters are regulated. No toaster manufacturer may peddle toasters that have even a 1 percent chance of catching fire. Toaster makers (and conservative economists) could point out that riskier toasters could be made more cheaply, and that permitting their sale would expand the number of toaster owners in the country. Companies might put special disclaimers and instructions on their toasters, telling customers how to extinguish the fires themselves. But as a nation, we have collectively decided that the risks posed by an unregulated toaster industry are not acceptable." 4

1 - 4. Warren, Elizabeth, and Tyagi, Amelia Warren. “The Cement Life Raft’ (Chapter Six)” PBS Frontline. November 24, 2004.

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Other Related blog(s): Nouveau Economics, Lyceum Recordz