The Bank is Not Your Friend

Here’s what they do.

Like millions of Americans, you’re living paycheck to paycheck. You’ve cut corners, you scrimp wherever you can, and you’re getting by. The bills are covered. There’s almost nothing left over, and sometimes things get a little rough when you’ve got a bill due Tuesday but you don’t get paid till Thursday, but still, you’re getting by well enough.

Then the economy changes. Or the markets take a little dive, for reasons that passeth understanding. Or your bank makes a lousy investment and needs to shore up its books from some other direction. Or there’s a southerly wind and a bank executive gets a headcold. Whatever the reason is, something happens. And your bank decides they want more of your money. Here’s what they do.

You’ve got credit cards. Each individual balance is a little high, but nothing dramatic, and you’ve always been able to make the payments, with a little extra thrown in to get the balances down. Slowly. Sloooooowly. But one day you get a notice from the bank that provides your credit card, saying that they’re lowering your credit limit--to an amount just slightly above whatever balance you happen to be carrying that month. Okay, well, that’s annoying, you don’t have any available credit anymore, but it’s not that big a deal.

But here’s what they do.

A month or two passes, and this has now happened to all of your credit cards. And now you get a new notice from the bank. It says that the ratio of your debt to your available credit is way too high. Dangerously high. Why look, you’ve maxed out all your cards! (Yes, that's right, it's your fault.) The only reasonable response, they say, is to raise your interest rate since now you’re such a big risk.

You did nothing. Absolutely nothing. But the banks have manufactured a crisis, and now they’re moving in for the kill. They no longer have to provide you any extra credit, plus they’re making a boatload more money on the same amount of debt you’ve always had. This is simply fantastic. For the bank.

But your month-to-month budget just got a hell of a lot harder to manage. It may even have become impossible, and there’s no fat left to trim. After living honorably your entire life, you’re forced to make an arrangement with the bank, which will generously agree to drop the interest rate again (maybe back to what it was before they raised it), and they'll set a fixed payment plan--but the card will be canceled, and of course this will have to go on your credit report. Which will follow you around for years, so that when your car breaks down and you need a new one, well geez, we can’t give you a decent rate because look what a big risk you are. Or they just won’t let you get the new car at all.

It could get even worse. You might be forced to default. Then collection agencies start harassing you at home at all hours. Lawsuits get filed against you, adding costs and attorney fees to the pile of money they want from you. They file a lien on your future earnings so that a big chunk of everything you make goes to them. Bankruptcy. Foreclosure. People forced out of their homes and onto the streets. And if that sounds melodramatic, it isn’t. It’s happening to thousands of people every year.

“But it doesn’t make sense,” you say. “It just doesn’t make sense for a bank to destroy its customers, that just starves the bank itself, in the long run.” Quite right. It doesn’t make sense.

But big corporations aren’t very good at the long run. They’ve got shareholders, and shareholders are only interested in the short-term. They want positive growth every single damn quarter, and if they don’t get it, the CEO will most definitely hear about it. A lot. Like when his earnings report adds millions to the books but still “disappoints” Wall Street because they were expecting something even higher. So the executives do everything they can in the short term to keep earnings as high as possible, and if that means destroying a couple thousand customers, well, those customers were a bad risk anyway. And besides, it’s a big country and there will always be more people to destroy next quarter.

That’s how they do it.