Why Big Banks Are Like Drug Dealers
Are you addicted to your bank? If you're paying off credit card debt right now, the answer is more or less, "yes."
And you're not alone. Americans are paying
Kicking the Habit is Already Cool
Most Americans prefer to spend their money the debt-free way, with a debit card. It's true: debit card transactions outnumber credit card transactions 2 to 1. This a big part of why I left one of the biggest banks in the country, Capital One, to found a new company designed to deliver the best debit card in the world. I believe Americans who choose to spend their own money and avoid debt deserve to be rewarded. They're making smart decisions. Many of them have moved to debit in the last few years because the debt hangover they were feeling at the beginning of the recession was simply too painful to bear any longer.
Make no mistake: The rise of debit cards before and during the recession has improved the lives of Americans. More debit means less credit, and less credit means fewer families in debt. But it's bad for big banks. If they get fewer people into debt, they make less money.
Thanks to the Durbin Amendment, a new regulation reducing the amount big banks can earn on debit cards, these institutions need to adapt their business models. Guess what they're doing?
If you guessed, "Finding innovative new ways to add value and make a profit," you're wrong. If it weren't for the most vociferous public outcry in the history of fees, which happened last month, these banks would have standardized a fee for just using debit cards. What's the plan being hatched in the marble-clad offices of big bank execs this month? Push customers towards their most addictive drug -- debt.
And big banks believe you're so hooked on them that you'll take it.
The Next Step: Getting You to Inhale
Yes, we all know by now that
This is the panacea in my industry: If internal problems cannot be solved, pass them along to the customer.
Watch for interest rates on checking accounts to drop even further. Watch for new fees and increased fees on basic services. Even now, many banks charge a monthly fee on basic checking accounts, and banks like
A little food for thought: If your bank is making your checking account more expensive but still offering you a "free" credit card every week, what do you think they're trying to motivate you to do?
Banks that increase checking account fees are trying to discourage you from spending your own money -- from spending responsibly. They want you to spend on credit.
The Endgame: Back To Credit Cards, Back to Debt Addiction
In the end, there's one thing big banks thrive on: increasing their customers' debt. When I was in my 20s, working at a big bank, I was paid to do exactly that. And I wasn't unique -- there were lots of people like me who received bonuses tied to performance and profits. Think about it: How do you increase profits if you're a big bank? You lend more. You get people deeper in your debt. Once they owe you money they can't pay in full, you can bump up interest rates and siphon money out of them while they watch helplessly.
In the next few weeks and months, the credit card offers will get more enticing than ever before.
You'll be offered all sorts of "deals" for getting a new credit card. Watch for new offers for airline miles (rewards for debt). Introductory offers proclaiming 0 percent interest lasting longer than you'd expect ("free" debt). The messages will be delivered by more famous celebrities, with more appealing sign-up offers and grander visions of greener pastures than our current unemployment rates could support. You'll even be offered free checking that's only available if you have a credit card, loan, or mortgage. Don't believe the picture that big banking is about to paint.
New credit card offers have already begun landing on kitchen tables across America. According to the
How hard are they pushing?
An industry analyst recently predicted a total of 5 billion credit card solicitations will go out in total this year. That's almost twice as many as last year and nearly four times as many as the year before. You don't have to be a banker to see where this is headed.
In case anyone is thinking that credit cards really aren't so risky, you should know that roughly half the families in this country are in credit card debt. If the dinosaurs had as much credit card debt as we do now, and they paid a dollar per hour to get out of debt, they'd still be paying today, because it would take about 115 million years to pay it all off.
Being in credit card debt is something you can't shake. No matter how you change your behavior after you've dug yourself in, credit card debt can haunt you for decades. It's like being addicted but it's worse, because there's no patch for this. There's no gum. If you're mired in debt, the bank owns you? fully.
You Hold the Power to Extinguish a Broken System
Let me be very clear: You do not have to accept this system, You have the power to create change. Just look at how many banks backtracked on charging debit fees. They didn't do this out of the goodness of their hearts -- they did this because you made it clear you were not going to accept it.
Let's talk about what else you can do.
Banks are losing revenue right now and their response is to ask you for more fees and debt. Just like your parents told you about any addictive drug -- Just Say No.
Move your accounts. Make a switch to a smaller institution that's not impacted by Durbin. Do not let banks push you away from debit cards, and absolutely do not get duped into moving to credit cards if you're a debit user. Believe it or not, I'm not the only CEO trying to change the system. Alternatives to big banks exist. When you move to something better -- something you feel good supporting -- you are declaring your independence from a broken system. You should feel proud.
In 1994, tobacco company executives testified before
Don't let yourself be trapped in bank products that make your life worse. Crush the pack. You have the power to change the system. Ten years from now, you will be able to look back at this moment as the time when we all woke up to our debt addictions. This is just the beginning.
- How to Live Happily on Less
- Do You Need Longevity Insurance?
- Why Big Banks Are Like Drug Dealers
- 11 Retirement Benefit Changes Coming in 2012
- 10 Ways to Stay Safe While Shopping Online
- Take Advantage of Free Shipping Deals This Holiday Season
- Working Into Your 70s: A Smart Retirement Move
- How Co-Workers Influence Your 401(k) Choices
- How to Find the Best Bank Account for You
- How to Keep Your Holiday Spending in Check
- How To Navigate the Bank Fee Storm of 2011
- Santa on a Budget? What to Tell Your Kids
- Young Adults Suffering More Financially than Older Generations
- Borrowing From the Family Bank
- Money Strategies for Creative Thinkers
- How to Maximize the Higher 401(k) Contribution Limit
- New Lower-Cost Reverse Mortgages Option Gaining Ground
- Small Medicare Premium Hike Improves Senior's Social Security COLA
- Five Quick and Painless Money-Saving Tips
- Considering a Credit Union? 3 Factors to Think About
- 2012 Social Security COLA: A Whopping 3.6 Percent
- Understanding Personal Bankruptcy in Difficult Times
- Why Women Should Manage Their Own Money
- How to Lower Your Gas Bill
- Financial Essentials for New Parents
- The Best Travel Rewards Credit Cards
- Living Together and Keeping Money Separate
- Pension-Raiding Epidemic Worthy of Condemnation
- What You Need to Know About Travel Credit Cards
- Vanishing Pensions Another Case of Corporate Greed
- Is Free Checking Going Extinct?
- Should You Use a Virtual Credit Card Number?
- 10 Ways to Tap Your IRA Early Without Penalty
- Should You Hire a Money Coach?
- The Twentysomething's Guide to Money
- How Couples Can Maximize Social Security Benefits
- 5 Factors That Could Put Your Pension at Risk
- How to Handle Awkward Money Situations
- Can I Afford to Quit My Job?
- How to Get the Salary You Want Even in This Economy
- Practical Steps Average People Can Take to Retire Early
- Are American Consumers Relapsing Into Debt Addiction?
- How to Complain to Companies and Get Results
- How to Catch up After a Retirement Savings Break
- Gen Y's $2 Million Retirement Price Tag
- Social Security: On Entitlements and Ponzi Schemes
- Reducing Debt Load Key to Financial Health
- Dipping Into Your Retirement Account to Pay for College
- Why Your Retirement May Not Be Permanent
- The 10 Most Difficult Retirement Decisions
- Retirees Increasingly Depending on Social Security
- Tougher Rules for Credit Bureaus Could Be On the Way
- Tips for Picking an Affordable Place to Retire
- One Move Could Boost Your Retirement Security
- 401(k) Withdrawal Mistakes to Avoid
- 6 Little-Known 401(k) Perks
- What's the Best Way to Save for College?
- How Do You Preserve Purchasing Power in a Tumultuous Economy?
- Steps to Financially Prepare Your Student for College
- How to Avoid Money Envy
- How to Make a Financial Comeback
- What New Inflation Formula Would Mean for Social Security Recipients
- How to Predict Your Social Security Payout
- Is Your Retirement Plan Obsolete?
- How to Strengthen Your Retirement End Game
- How to Avoid Online Shopping Scams
- Dodging the Real Estate Down-Payment Obstacle
- Will This Home Renovation Pay Off?
- Family-friendly Ways to Save Water
Personal Finance - Why Big Banks Are Like Drug Dealers
(c) 2011 U.S. News & World Report