For many, consumer credit can provide convenience, easier access to high-dollar items and security not always afforded by cash. On the other hand, misused loans infer a false sense of wealth, leading to financial troubles that may range from minor setbacks to overwhelming crises.
According to the Federal Reserve, U.S. consumer debt (not including mortgages) was $2.46 trillion dollars as of June. Along with the emergence of payday loans, and the more recent subprime mortgage debacle, some feel unregulated lending calls for better consumer protection. However, those in the banking industry see easy access as the " democratization of credit," where risk-based pricing has made it possible for nearly anyone to access loans. So is lending just getting a bad rap?
In 1978, the Supreme Court decided to allow banks to follow the usury laws of their home state. Usury laws, which limit the amount of interest lenders can charge on loans, are not capped at a federal level. The result was a late '70s relocation of many banks to states that had eliminated these laws--namely Delaware and South Dakota--which had hindered development in the credit card industry. Further deregulation in 1996 has resulted in higher interest rates, more fees and generous lending to riskier consumers--practices many consumer advocates feel have been detrimental to cardholders.
Before delving too far into credit cards, it's also important to examine one type of lending that has a much worse rap: payday loans. In the early '80s the New Mexico Legislature followed a nationwide trend and repealed the state's usury law. New Mexico saw the rise of the payday loan industry, which emerged in the early '90s and came into its own in the early part of this decade. Payday loan operations provide small, short-term loans attached to expensive fees. Deemed predatory lending, the payday loan industry has undergone widespread public scrutiny, with many states enacting laws against it.
"If this person didn't have enough money to pay back the $100 loan in the first place, what are the chances that they are going to have enough to pay back the $300 or $400 loan?” says Omar Ahmed, director of communication for the New Mexico Media Literacy Project (NMMLP), which has worked with state legislators to provide information about payday lenders' marketing tactics. “It starts a perpetual cycle that a lot of folks, especially people that are not represented, undereducated or don't have all the facts about the system, can get caught up in."
According to Ahmed, NMMLP found that some payday loan operations were backed by big-name banking institutions such as Wells Fargo and Bank of America. "They may own a subsidiary that owns a subsidiary, that then funds these folks. In the grand scheme of the conglomeration, they are the parent company that is initially providing the funding for these organizations."
John Hall, spokesperson for the American Bankers Association (ABA), which advocates for the banking industry, says this is not true. "There may be some banks that fund them or have accounts for them because they need an account, just like you and I need a checking account. But that doesn't mean they run the business or that they are in the business. They're just trying to make a linkage there because it's much more nefarious."
Last year's state Legislative Session saw the passage of HB 92, "Payday Loan Regulations," which went into effect Nov. 1. The new law caps interest rates, eliminates rollovers (where, when the borrower can't pay on time, the loan is extended, resulting in the accumulation of large fees), reduces the duration of loans, prohibits loans greater than 25 percent of the borrower's income, requires lenders to report to a statewide database and allows borrowers to request payment plans.
"With the passage of this law there are a lot of companies that will no longer sell payday loans as a product," says Attorney General Gary King, but adds that we haven't seen the last of payday lenders. "I don't think most of those companies are going to go out of business; I think they are going to look at different kinds of financial products they can offer."
"[Credit card companies] target students specifically because they're less likely to pay off these debts," says Chris Smith, campaign coordinator for NMPIRG at UNM. "We just feel that targeting students is predatory lending because they are not as well-educated about financial issues, exactly what a credit card entails and what interest rates are."
According to a study by national PIRG, 83 percent of college students own a credit card, 25 percent say they've paid for tuition with plastic, while the average student graduates with $4,000 in credit card debt. Smith, whose organization has run counter-marketing campaigns for a fake credit card called Feesa, says while PIRG does not consider credit cards predatory lending per se, the organization is trying to stop on-campus credit card marketing and promote consumer awareness.
Much of that awareness deals with the fine print: Changeable due dates and interest rates, low teaser rates and universal default (where if a borrower fails to pay an electric or phone bill, for instance, the lender can raise interest rates) are among the things consumer advocacy groups say have resulted in growing debt and growing consumer complaints.
Hall of the American Bankers Association says debt levels have actually remained stable and many groups are too loose with numbers, often not adjusting for inflation. He says the average household credit card debt is $2,200, and 52 percent of cardholders do pay off their cards in full every month. "There are two things that every cardholder is asked to do by their credit card company: One is to pay their bill on time, and the other is to not go over their limit. Generally, if you follow those two rules you won't have any added costs at all--you'll still have all the conveniences the card affords," Hall says.
Emmanuel Morales-Camargo is an assistant professor at UNM with a Ph.D. in finance. Before coming to New Mexico last year, Morales-Camargo was educational adviser to an organization at the University of Arizona that provides free personal finance education. He is also writing a case study book on financial literacy. He says that when it comes to overwhelming debt, a lack of education is the true culprit. "We cannot preclude [credit card companies] from trying to market their products to those who are eligible, legally. So who is to blame? I think we all share a bit of it.”
One thing that people on all sides of the issue could agree upon is that there is a lack of financial education in America today. Pro or con, the fact is the banking industry isn't going to become more regulated any time soon, so avoiding money troubles is up to individual consumers. Most everyone interviewed for this story encourages consumers to get informed before getting into bed with any old lender. Federal Reserve