In case you haven’t heard, a consumer group and financial services group requested that credit card issuers be allowed to forgive some of the debt of credit card holders. What? Are you kidding me? I could maybe get behind the new foreclosure plan that doesn’t actually forgive principal balances, because some people were genuinely defrauded by mortgage brokers, but no one was forced to use a credit card!
Why Credit Card Debt Forgiveness is Bad
Simply forgiving up to 40% of credit card debt is bad for three reasons:
1. This debt was accrued by choice. The typical debt is not the result of a medical emergency or falling home values. It’s a result of people buying stuff they can’t afford and then deciding not to pay off the bill at the end of the month. People who have their credit card debt forgiven without going through some kind of difficult process, like bankruptcy, won’t learn to budget. They’ll just wind up in this situation all over again.
2. We already have a system to forgive credit card debt. They call it bankruptcy. If you qualify, judges can reduce or eliminate credit card debt. If you don’t, then you get put into a payment plan. This plan applies to the types of situations where people would file bankruptcy, but without the pain or the process.
3. Banks don’t need the government’s permission to write down losses. They can do that it already, but they want the government to change accounting rules so that writing down credit card losses is advantageous to the banks. So, now the banks won’t learn a lesson either. No one made them issue those credit cards. They knew the risks, and they should accept the consequences.
Yes, I Do Think People and Banks Need to Accept the Consequences
When I was younger, I backed up without looking and caused $500 in damage to the car behind me. My parents made me pay for that out of my own pocket. From that I learned to be more careful while driving. If they’d just let me off the hook, I wouldn’t have driven as carefully in the future.
The same goes for the banks and consumers: the various government bailout programs are giving the impression that American consumers and businesses can be as irresponsible as they want because the government will fix it if it gets bad enough. Banks don’t have to manage risk because they can earn mega-profits and then Uncle Sam will cover any of the losses. The American people don’t have to get spending in control because the government will bail them out if it gets really bad.
I heard a great quote this morning from Newt Gingrich, a man I do not normally agree with: “You can’t have capitalism on the way up and socialism on the way down.” Amen to that. If I choose not to pay my electric bill, the electric company doesn’t forgive the debt. They shut off my electricity. But now various groups are looking to the government to keep the electricity for months after the bills have stopped being paid. That’s not fair to those of us who are responsible with our money, and it sends the wrong message to banks and people who choose not to be.
What do you think of the credit card debt forgiveness plan? What else is making you stabby in this week’s news?