Tuesday, May 22, 2007

Dances with credit cards

Americans reeling under credit card debt

From the Statesman

In the United States, cash only life style has long been gone, as dead as the dodo.

A graduate student, let us call him Johnny Footloose, told me the other day that money was his least worry, though he would be under debt to the extent of $150,000 by the time he graduated.
Every body in the United States lives on credit, he said nonchalantly. Banks are eager to loan money to anyone who has a minimal threshold of creditworthiness. Last year according to the New York Times the industry mailed more than 8 billion solicitations to people offering them credit cards. There are 640 million credit cards in circulation in the United States for a total population of 300 million. American economy depends on consumer spending.

Will the American model work for a country like India, especially now when credit cards are being issued as generously and liberally as they are done in the United States? Sooner or later, as Indians pursue the American way of life, they too will be sucked into the consumerism tidal wave with unforeseen consequences for the economy.

Whether it will create an economic miracle or bubble bust, it is difficult to say; but a middle class Indian will live in perpetual debt, as Johnny Footloose will do for many years to come, making monthly payments not only for his college debt but also for the home mortgage, home equity loan, car loan, and his children college education. And if Johnny Footloose faces divorce, a highly probable domestic future for many Americans, or if there is a major medical catastrophe uncovered by his health insurance, he will look at his college days of freedom and misplaced optimism with nostalgia and much regret. Of course usurers (banks and credit card companies charging from 12 to 39 per cent interest on credit card debts) are doing well in America.

There was a time when American consumers used credit cards mostly during a holiday season. Now it is an all season credit universe. When bills begin to pour in and borrowers are unable to pay them, they juggle their debts from one credit card to another. In spite of the fact that the law in the United States now makes personal bankruptcy rather more difficult, about a million people are likely to file for bankruptcy by the end of the year.

Once out of bankruptcy, they will do it again. Bankruptcy is no shame in the United States; only a minor embarrassment. Call it a method of reorganizing one’s life. Americans routinely use the card to make all kinds of payments: medical bills, groceries at the supermarket, college tuition bills; and even online porn. It is so convenient. In fact consumers are rewarded for using their charge cards. Many card companies offer cash back, frequent flyer miles, or some other sexy temptation every time the customer uses the card. Enter any major chain store, especially during a holiday season, a beautiful girl greets you: “If you open the credit card account now, you will get 10 percent discount on all your sales today. Just do it. You can cancel it any time” With very little background check, instant credit is issued to the customer and the spending spree begins.

The US economy is very healthy and has been growing at a slow but steady pace in spite of the 9/11 terrorist attacks and the Iraq war; but one wonders where the money is going. The average household carries $ 10,000 debt. Without savings, how can a family balance its budget in tough times, except through more borrowing with the credit card? According to Federal Reserve estimates, the total credit card debt carried by the US households last November was $750 billion, which is more than 10 times the gross domestic product (GDP) of Bangladesh.

Bankers nonetheless do not feel that credit card delinquencies pose a serious threat to the banking system because most card customers are good, so good that their business covers up not only the losses due to bankruptcies but also due to frauds. Although the cardholder liability in fraud cases is limited, it is a terrible hassle to face inquiries.

Every year thousands of people become victims of card frauds. There have been several reports from major news networks whipping foreign hackers, Nigerians and Russians, for most of the card frauds in the United States. Nigerians or the Russians may be slick operators, but credit card thieves come in all shapes, colors and nationalities and they have the same modus operandi: hack into the data bank of a major retailer and once logged on, download customers’ social security, credit status, and addresses. With stolen ID they can live the other person’s life for a long time and then move on to another victim. Credit card companies are not much scared of frauds because they pass on the cost of fraud to their good customers in the form of higher finance charges. The Federal law limits to $50 the cardholder’s liability for unauthorized use.

The usurer, the debtor, and the crook are all doing well in the United States, but it is a continuous challenge: life in perpetual debt, instead of freedom from worrying of paying next month’s bill. That should not become the future of a middle class Indian family in 2025, when, according to a McKinsey & Company report, there will be 583 million uppity Indians dancing with their credit cards.

(ND Batra teaches communications and diplomacy at Norwich University and is the author of Digital Freedom forthcoming from Rowman & Littlefield)

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