So - I was having a debate a while back with a friend and our discussion keeps surfacing in my mind. We were reading the news of all the bank failings and bailouts seemingly crumbling like houses of cards. A friend of mine proposed the following solution for everyone holding any substantial credit card debt prior to the big bank bailout. Is this a slim possibly on the horizon? Feel free to post your thoughts. He called it the "Keep It Simple Stupid - Bailout Program" or "K.I.S.S." for short.
First - Average per person Credit card debt in this country is astronomical. The average U.S. credit card household debt is $16,007 [** - Calculated by dividing the total revolving debt in the U.S. ($864.4 billion, as listed in the Federal Reserve's March 2010 report on consumer credit) by the estimated number of households carrying credit card debt (54 million)]. The Average APR on credit card with a balance on it is 14.31 percent, as of December 31, 2009 (Source: Federal Reserve's G.19 report on consumer credit, March 2010).
14.31 percent interest on a $16,007 balance comes to almost $2,290 per year. This is JUST THE INTEREST PAID TOWARDS THE BALANCE, not what is required to reduce the principal amount of the credit card debt. Think about the implications. To pay that amount off in one year, you would have to pay $1,524.75 PER MONTH. Due to interest rates, the numbers only get higher and more complicated when you spread it over several years. How long will it take for the majority of Americans to dig themselves out of debt in an economic recession? This question is not posed as a red herring for who is really to blame for the accruing of debt. That's simple - you are responsible. Don't spend what you don't have. But here we are. The only way to look at this is from today and chart a path or course towards the future. Change habits, understand the difference between needs and wants, etc... Ask yourself - how much does it really take to live one week, or one month? Get real with those numbers. And if your month end number of remaining available cash comes up as a variable amount, you might want to lock up your credit card and re-do this exercise.
My friend proposed a simple plan. It seems to be a possible foundation of one plan vying for a solution. It is not an ironclad panacea for our dismal state as a whole, but one worth considering and it works like this:
Instead of a massive bailout, the government buys all credit card debt from the Banks/Credit Card Companies, effectively zeroing out all their receivables (particularly the debt that is not prime). The government now owns all of this credit card debt. Now the government issues a federal credit card to the troubled individuals with debts they seemingly could not climb out of due to a tough economy and 27% interest rates or more being charged monthly for consumers past mistakes. The government issues a new credit card - originally with the same limits or slightly lower; however they set the maximum national interest rate on every balance at 5%. This will give some breathing room to those that have not been able to eat away from their principal, and actually create a clean and clear path on how to become debt free. Once the government issued card is paid off, the consumer can rejoin the traditional credit card firms, or possibly get more favorable terms from a different government card with perks. I am all about the free market, but credit card spending has spiraled out of control due to countless factors - none more so than human impulsivity.
Meanwhile, the government will have just secured themselves an immediate guaranteed interest rate of 5% monthly on all credit card debt to their bottom line; this can be invested and compounded, ultimately becoming a very solid financial investment decision and money maker for the federal government. Total U.S. revolving debt (98 percent of which is made up of credit card debt): $864.4 billion, as of January 2010 (Source: Federal Reserve's G.19 report on consumer credit, March 2010). This comes to roughly $43.22 Billion in additional revenue for our government - all in the name of reduced monthly and annual credit card interest rates for consumer debt, thus generating much needed taxes and alleviating financial strains on family's daily lives. Our country is in a considerable amount of debt and this could prove to help offset that debt while giving a structured and guided path for its own citizens to get themselves out of the deep hole they find themselves in daily.
Certainly the government will have more upside from this K.I.S.S. financial arrangement than simply bailing out the "too big to fail banks", as this bailout lacks any real guarantees that "we the people" will actually get paid back. Our tax dollars paid for this bailout in one form or another. From what I have seen, Big Banks have followed their natural path of least resistance and hoarded this windfall of cash - rather than distributing it out to small businesses in the form of small business loans, investments locally, home loans, etc... when it was intended to spur economic growth. Or maybe this hybrid approach is too altruistic for political consideration.
*Statistical information in this post can be found at http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php
Tuesday, May 11, 2010
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