Credit Card Debt Caused By Choice, Not Evil Companies

I’ve been hearing a lot about congressional oversight of credit card lenders in the news. Much of the media coverage seems highly negative and appears directed at credit card companies for their abusive lending practices. A lot of these negative stories argue that these companies are abusive to the extent that they are like drug dealers.

The Drug Dealer Theory: An idea that’s not being well expressed in the notion that credit card companies CAUSE credit card debt. This idea says that credit card companies are like drug dealers, they get kids “hooked” young and keep them dependent by charging high rates of interest and fees. The major problem with this whole metaphor is that it totally ignores the fact that individuals own choices have caused their debt.

Free Will. The average American household has a median credit card debt of $2,000 (here). In order to attain this level of debt, individuals usually repeatedly decide to borrow from their credit cards. For example, one might paid their rent with their card one day, the next week, they might buy a pair of shoes, and the following month go to a nightclub or spend money at 7-11, all on their card. The main point here is that the amount of credit card debt carried by families is usually racked up within the context of a repeated set of choices.

The flip side to this that persons who have gotten out of debt such as my wife and Trisha over at blogging away debt, have both exercised their own initiative and reduced their debt levels. So, acquiring debt, or getting rid of it, are both expressions of free will, not the actions of some evil company.

Focusing on Companies is Dumb: The key point here is that credit card debt is caused by CHOICE, NOT credit card companies. While some practices such as universal default are problematic, as long as people continue to choose to use credit cards, the problem of debt will remain.

The proper policy response should be educate consumers. This means congress should think about funding effective personal finance education in high schools and colleges. Focusing on the companies themselves is misguided and fails to address the roots of the real problem.

Best,

James