Ask Auntie Pinko
March 10, 2005
By Auntie Pinko
I manage my money carefully and use credit cards wisely. I'm
not rich, I make less than $40,000 a year, but I manage to save
at least $4,000 a year in IRAs and a regular savings account. I
don't buy things I don't need and my kids don't wear designer sport
shoes. I don't see why responsible people should have to bear the
burden for irresponsible people who overspend their income and can't
say "no" to their kids. What's wrong with bankruptcy reform? Shouldn't
people have to pay the price for their own irresponsibility?
Congratulations on your sound family financial management. Auntie
hates to bring this up, but a great many people who declared bankruptcy
last year are just like you.
The only difference is that, at some point, something entirely
beyond their control (catastrophic illness or job loss) happened
in their lives, and even those who had health insurance and/or savings
accounts were unable to continue making mortgage or rent payments,
paying utilities, car payments and/or insurance, health insurance
premiums, taxes, student loan payments, and other expenses outside
their ability to cost-control.
The Consumer Bankruptcy Project at Harvard University has been
studying bankruptcy for fifteen years. It may surprise you to learn
that only 4.3% of the consumer bankruptcies filed in 2001 were because
of credit card debt. Some other interesting facts:
- Over 90% of those filing for bankruptcy in the year that
ended 6/30/03 were middle class families and individuals.
- The number of senior citizens filing for bankruptcy increased
244% percent between 1991 and 2001.
- In 1971, the average one-income family spent 54% of their
income on "non-discretionary" costs like taxes, mortgage, health
insurance, car payments, etc. In 2001, an average family with
two incomes spent 75% of their income on non-discretionary
costs. Families are working harder, and still have less control
over their money, and less margin for savings.
- About half of the bankruptcy filers experienced "medical
bankruptcy" (that is, bankruptcy related to health care costs)
and of those, more than 75% had health insurance at the onset
Some ask why so many people rely on credit card debt as their
emergency safety net, and why they have so much trouble managing
even "necessary" credit card debt. It might be enlightening to note
that according to an FDIC study, the dramatic rise in bankruptcy
rates is directly linked to banking deregulation, which has allowed
the credit industry to engage in unrestricted predatory and exploitive
Deregulation has allowed the credit card industry to employ sophisticated
marketing to prey on financially vulnerable users. The aim of the
credit card companies is to acquire users who will maintain high
balances, make minimum monthly payments and pay hundreds (or thousands)
of dollars in interest. Without regulatory standards in place to
limit interest rates and establish standards for credit-worthiness,
credit card companies are free to dispense multiple high-interest
cards to high-risk individuals.
In other words, it is the credit industry's own business practices
that promote the massive growth of consumer debt. And their response
to higher levels of default and bankruptcy has not been to be more
responsible in their lending practices, but to become more predatory,
raising interest rates arbitrarily, instituting high fees for an
increasing range of reasons, and issuing even more credit cards
at even higher risk of default. Using these tactics, the credit
card industry has not just maintained, but increased its profitability
even as bankruptcy and default rates have soared.
If there's irresponsibility involved here, Keith, Auntie would
have to say that the impact of the credit card industry's rapacious
practices is far, far larger than the impact of the 4.3% of filers
whose bankruptcy can be traced solely to credit card overspending.
Anyone who wants to check the figures quoted here is free to Google
Consumer Bankruptcy Project and FDIC bankruptcy study. There's a
lot of interesting information out there on the Internet, and I'm
sure your time won't be wasted. Thanks for asking Auntie Pinko!
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