Bill Griffeth, Anchor:
For the most part, when you get your credit card bill each month, the so-called, required minimum payment you see on that bill, represents about two percent of the balance you have outstanding. Well, some credit card companies are thinking about raising that-doubling it to four percent. Good idea? Bad idea?
Joining us with both sides of that issue, Michael McAuliffe. He's President, of Family Credit Counseling Service, he joins us today, from Chicago. Thanks for joining us.
Michael McAuliffe, President, Family Credit Counseling Service:
Thank you.
Griffeth: What do you think good idea, bad idea?
McAuliffe:
Well, I think it's a good idea and I think unfortunately, over the years, consumers have become accustomed to charging things up and letting it go on for thirty, thirty-five years. The cost for the burden that they're under is terrible and this is one of the ways to fix that.
Griffeth: What about for those people who can't afford four percent of the initial balance?
McAuliffe: Well, it's hard medicine to, to swallow. With any medicine, I think you're going to have side effects-and there are going to be some people this is going to hurt. And, there are alternatives for them. I know we talk to hundreds of families a day and when we look at the budget we find discretionary spending.
They could put extra money towards these minimums, but they choose not to because there's other things they want. They don't see debt reduction as a priority.
Griffeth: Why would banks be doing this?
McAuliffe:
Well, it's actually the Office of the Controller of the Currency that has been after the banks for quite some time now, to get these payments increased. They've been going on so long and everyone's getting concerned. We've got people that are, really, going to have these debts for thirty, thirty-five, forty years, making minimum payments. You're paying for your TV longer than your house!
Griffeth: Joining us now with the other side of that is Robert Manning, he's a Professor of Finance at the Rochester Institute of Technology. Professor, good to see you, thanks for joining us.
Robert Manning, Professor of Finance, Rochester Institute of Technology:Oh, it's a pleasure to be with you, this afternoon.
Griffeth:
What do you think of the banks want to raise that minimum on the balance on a credit card?
Professor Manning:
You know, this is a real difficult situation because this was not intended to help consumers. This is really an issue with the FDIC and the Office of the Controller of the Currency that's concerned about some portfolio quality of some bank of some bank credit card debt. Particularly in regard to sub-prime lending.
The problem here is, is that the banks have over lent, they've over-extended people, they are charging much higher interest rates than they would, in terms of, uh, general underwriting criteria for consumer loans. And now, they want the best of both worlds. They want people to repay at twenty-eight percent, instead of giving some responsible relief to consumers that they knew when they made the loans, they couldn't possibly repay them.
Griffeth: Wait a minute you're, you're saying that the high credit card balances that we see, for the most part, throughout the country are the banks fault?
Professor Manning:What we're seeing here, for certain segments of the market that the banks know that if somebody already has twenty-five thousand dollars in credit card debt, that that next twenty-five thousand dollars in line-of-credit that they offer, is very, very highly risky. And yet, they want to be repaid at the same rate as the very first loan that was made.
Griffeth: Mister McAuliffe, I would imagine that as a credit counseling service, you would tell people to pay more than the minimum balance anyway, right? Or the minimum required payment.
McAuliffe: Oh, absolutely, and I can't agree that thirty-five year repayment is a responsible way to pay back debt. Especially when you're talking about unsecured debt. The majority of credit card transactions are discretionary spending-that's not things we need. Its electronics, its clothes, its groceries, going out to eat, we're spending a lot of money on it.
Griffeth: Yeah, what about that Professor? I mean, you know, if you just pay that two percent every month, you're never gonna get that paid off. It's gonna take you years to do it, why not pay more?
Professor Manning: Well, you know, it's a little bit duplicitous to have consumer credit counseling that acts on behalf of banks, to have a repayment schedule that creditors are going to get most of their money back, when they know very well that, charging people twenty or twenty-five percent is what's responsible for a thirty year repayment.
If banks have loaned amounts of money that they know can't be repaid, they should work with consumers, bring that interest rate back down to six, seven percent and really have them become more responsible in their consumption. To argue in today's day and age, that people are only charging with their credit card, discretionary purp-uh, purchases really flies in the face of the reality of what distress and financial problems in America, today, is all about.
Griffeth: What about that, Mister McAuliffe?
McAuliffe:
Well, if consumers are living off their credit cards, they've got more problems than what the banks are doing with, with issuing the credit cards. If you're using your credit cards for your living expenses, you've got some serious problems. And paying those living expenses off over the next thirty years, is just a bad idea for consumers. To burden them with thirty-five years for paying off credit card debt for things they need today-when are they going to get out of that?
Professor Manning: And indeed, that's where credit counseling should come in and negotiate on behalf of creditors to get a six percent interest rate, rather than protecting the position of banks, to make them repay at a thirty percent interest rate.
Griffeth: Yeah, but that's not likely to happen, given the number of delinquencies and, and the, uh, the threat of ID theft. These credit card companies have enough, uh, expenses to begin with and that's why we're paying these high rates to begin with, isn't it, Professor?
Professor Manning: Oh, no. I think that flies in the face of the reality of an industry that's registered seven consecutive record years of profitability. Where the cost of the money that they lend to consumers has declined over four years and they didn't pass on those savings to consumers that's really a different approach to what the cost of credit is all about.
Griffeth: Gentlemen, thank you both, appreciate it, uh, very much. Robert Manning, the Professor of Finance at Rochester Institute of Technology, Michael McAuliffe, of Family Credit Counseling Service, in Chicago.
