Are Banks Responsible For The Credit Crunch Many Are Feeling?
Higher prices and lower home values are contributing to the credit crunch that many Americans are feeling right now. I saw a story this week on ABCNews about a guy who owes $78,000 of debt at least part of which is on unpaid credit card bills. According to the story, he repeatedly accepted new credit card offers he received and continued charging as his credit limit went up.
In another story, we find that it isn’t just the average American that has a ton of consumer debt. Apparently, members of Congress have also accumulated some impressive sums on their credit cards. Rep. Jim Ramstad, a Republican from Minnesota recently reported that his wife owes credit card debt with American Express and Neiman Marcus totaling between $30,000 and $100,000!
The role the banks played in creating the credit crunch.
Banks aggressively market credit cards to consumers. There is no question about it. They send endless offers through the mail and use the media very effectively to sell the idea of credit as a tool for a better lifestyle. Banks are also very liberal in the way they raise credit limits to encourage more debt. Also, at the height of the housing market, banks started pushing home equity lines of credit as a way for consumers to consolidate credit card debt to get lower payments.
Of course, once the debt is transferred off the credit cards to the home equity loans, many people simply start charging again. This is the vicious cycle that created so much debt for many. Banks certainly did not discourage this behavior. In fact, I bet they delighted in it because more debt means more interest owed which means more profit.
The effects of the credit crunch on families.
According to an article in USA Today, credit card delinquencies are at a six-year high and the amount America owes on revolving credit is soaring. The total revolving household debt topped $969 billion in 2007. Once families get behind on their credit card payments, then banks increase their interest rates and start charging late fees. Of course, for those in a financial crunch this just accelerates their demise.
In addition to the credit card woes that many face, foreclosures are also at record levels. People that borrowed money via home equity loans at the height of the market are now finding that they are upside down in their homes. In one example cited by USA Today, a woman withdrew equity and now owes $105,000 on a home that is only worth $63,000. In addition, she has charged up $30,000 on credit cards. That is what I call a credit crunch!
Who is at fault for the credit crunch?
In my opinion, the individuals, not the banks, are at fault for creating this so-called crisis. The banks didn’t hold a gun to anyone’s head forcing them to apply for credit cards or home equity loans. They also didn’t force anyone to spend beyond their means like so many did. The banks offered a product that people willingly consumed. They legally loaned people money with an agreement to be repaid with interest. Of course, the people that are now in a financial pickle want to be able to blame someone else instead of accepting responsibility for their actions.
I guess these individuals hope that the government will come to their rescue and bail them out. Well, I’m definitely against this. I don’t want my tax dollars to have to pay for their stupidity. I have been responsible with my money and now I don’t want to penalized for the mistakes of others.
What you can do if you feel the crunch.
If you are feeling the credit crunch yourself or if you know someone that is, please let me share some suggestions that will help.
1. Accept responsibility for your actions.
Admit that you got yourself into this mess and resolve to get yourself out. It is only hopeless if you give up. I wrote an entire article yesterday on accepting personal responsibility as a way to a better life. Read it!
2. Quit digging yourself into a deeper hole.
Stop spending more than you earn! If you don’t have the cash to pay for it, then don’t buy it. It really is that simple. Quit charging things to your credit cards. Cut them up. I know this is radical, but it is a necessary step. You have to commit yourself to change.
3. Create a budget.
Get serious and start living on a budget. Trust me, I know that you don’t want to do this. However, it is the ONLY way to turn your situation around. Living on a budget really isn’t that bad. In fact, it is liberating. You’ll feel so much better about yourself when you know that you are doing the right thing with your money. You can stop laying awake at night worrying. Do this now!
4. Start paying off debt.
Create a plan to start paying off your existing debt. It can be done. Learn how to start a debt snowball and to use the snowflaking technique to maximize your efforts. Most people can be completely out of debt in 18 to 24 months. I know this probably sounds impossible to you right now, but it is true. You just have to want it bad enough.
5. Vow to never, never, never go into debt again.
You have to promise yourself never to go into debt again. Carve this in stone. Write it on your forehead. Debt is too risky. The current credit crunch that is causing all the foreclosures and bankruptcies are proof that carries risk. Is it worth it? I don’t think so!
6. Educate yourself.
Being sensible with money is not that hard once you have a plan. There is plenty of great advice out there and most of it is free. You can start today to learn the basics to help yourself out of the current mess. Here are a few great places to start:
What’s Your Financial IQ- Here’s A Test @ Moolanomy
Book Review- The Total Money Makeover @ Frugal Dad
Create Your Own Dollar Plan- Step 1 @ My Dollar Plan
25 Ways I Save Money @ Cash Money Life
25 of the best books about money @ Get Rich Slowly
Wake up and beat the crunch!
While banks certainly played their role in this mess, I don’t think they did anything really illegal or unethical. They simply sold their products to millions of willing consumers. Could they have refused? Sure they could have, but more importantly, we as intelligent individuals should have said no. We control our actions and now it is time to take responsibility and fix the mess we created. It is time to wake up and beat the crunch!
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David | Jun 19, 2008 | Reply
I could not agree more Jeff, and great tips to help people avoid making this even worse!
B Smith @ Wealth and Wisdom | Jun 19, 2008 | Reply
Jeff-Are you crazy? Expecting people to take responsibility?
Seriously, thanks for speaking up on this. Yes the banks practices are wrong, predatory, and contribute to the problem. That doesn’t make them the problem. Our lives are our own responsibility. We make choices every day and need to live with the consequences.
Personal responsibility is a cornerstone to success. Each and every success guru will tell you this. Heck, it is the first habit that Stephen Covey teaches!
Lynnae | Jun 19, 2008 | Reply
I completely agree with you. Although I do think banks need to be held responsible for the deplorable practices they use to prey on people already in debt, as Dave Ramsey says, “Play with fire, and you’re going to get burned.”
If people (like me) never got into credit card debt in the first place, questionable practices by credit card companies would never be a problem.
Thanks for the link!
Jeff | Jun 19, 2008 | Reply
@David - Wouldn’t it be great if people started acting responsible with their money?
@B - I know, I know! Responsibility and accountability are two things no one wants. I must be losing my mind!
@Lynnae - Banks have definitely played their part in this mess. Of course, when people continue to fail to payback the debt, the results will be self-critiquing for the banks.
Thanks for the great input!
Alessandro Machi | Jun 19, 2008 | Reply
Of course the banks ARE 100% at fault.
Not for what the consumer has wrought upon themselves, but by becoming addicted to the credit card PROFITS. To add insult to injury, the CREDIT CARD PROFITS are used to ship jobs overseas via investment capital.
That makes a lot of sense, charge more in interest over a period of time than a consumer paid on the original, disposable item, then take the profits and suck the life out of the american economy.
Now I get to read how you defend this practice. Thanks pal.
http://www.Credit-Card-Cap.com
http://www.Credit-Protector.com
Paul Singh | Jun 19, 2008 | Reply
I’d say the blame should equally be distributed between the lender and the borrower. Here’s my reasoning:
Just last night, I received a phone call from someone representing HSBC. She indicated that “stellar” credit history deserves recognition and she’d like to verify my address so they can send over a pre-approved Visa Platinum card. I politely declined and mentioned that I prefer not to carry any debt month-to-month.
Rather than give up, she replied “Great! I’ll just send you the check for the money - use it whenever you like!” I ended up declining and asking her to remove me from her list.
The point: banks are a business, plain and simple. Their job is to make money for their investors and shareholders. At the same time, borrowers should be aware of the risks and educate themselves on basic money management - interest rates, billing cycles, etc.
If you don’t understand something and you *still* sign the document, I don’t really have any pity for you.
Jeff | Jun 19, 2008 | Reply
@Paul Singh: I agree that banks are aggressive in their tactics to say the least, but the media seems to be trying to make them out as villians. The way I see it, banks simply sold their product. It was the consumers that bought too much of it. It seems akin to blaming McDonald’s because someone got fat eating their food.
Marc and Angel Hack Life | Jun 19, 2008 | Reply
I like the message about taking responsibility for your own actions. As far as the blame is concerned, greed overpowered the minds of decent people on both ends of the spectrum. Greed is vicious…
Jeff | Jun 20, 2008 | Reply
@Marc: You are absolutely right about greed. It drives people to do really stupid things. Did you see that two ex-hedge fund managers from Bear Sterns got arrested? They could spend time in jail for their greed.
Andrea Smith | Jun 21, 2008 | Reply
Credit card debt is on its all time high with today’s economy. Hopefully people can obtain the help they need to get out of debt. Thanks for the article!
Patrick | Jun 21, 2008 | Reply
Jeff, very solid article highlighting one of the most important things most people will never realize: People are responsible for their own actions. Unfortunately, too many people look for someone to blame.