Sunday, May 17, 2009

Credit Card Reform might mean..

Credit Card Reform might mean three things:

1. A reform on Education
2. A reform on Cultural consumption
3. A reform on Company accountability

In terms of education, it's been long debated that PERSONAL FINANCE MANAGEMENT course should be added in a student's curriculum as early in high school. We're not talking about hundreds of formulas and the same text book problem solving year after year. This particular course should strictly focus on the consumer trends and factors that directly affect the financial standing of a person. It should teach sound decision making skills in managing ones finances. As early as High School when students start budgeting their allowance while exercising their decision-making skills in matters of spending, the course should be able to teach them to efficiently budget and think of money-saving alternatives. The proper budgeting skills and being smart about resources should be mastered like ABC's. It would also introduce basic money computations of monetary resources that would later turn into dabbling knowledgeably in investments and stocks. The course would eventually teach people to be smart about finances by letting money work for them and not just by focusing on how to work hard for money.

I admit that I am the last person to love mathematics, particularly algebra or calculus. If you know some people who question why we are studying these subjects unless we wanted to be programmers and scientists, I'm one of those. I knew early on that I would forget the fundamentals of algebra as soon as I step into the real world. Why study it in the first place? Why not study finance?

As far as I'm concerned, it's more practical to rehash the course involving too much mathematics that we don't need and instill the kind of math in the realm of finance. It is the kind of math we could use regardless if we decide to be engineers or programmers in the future. Take for example with credit cards. If people are educated enough of the responsibilities behind using one, then I don't think banks need to educate and spend more time running after people. If credit card holders know how much they are paying for their bills and are knowledgeable on how to compute which particular credit card to use that has enticing interest rate schemes, then I don't think we would be causing ourselves too much financial stress. We would be empowered.

With the proper education, monetary instruments such as credit cards would be used less and wisely. Also, properly educating ourselves in terms of budgeting, investing, managing credit card bills, purchasing and basic tax would be more useful than all the advanced algebra and calculus students need to pass without exactly knowing and appreciating the reason why.

II. Change in Culture

Credit cards have contributed much to the global financial crisis. People have become trigger happy. I know the psychological feeling that using Credit Cards do not really feel like paying with cash. There's an instant satisfaction of purchasing something without the need of producing resources at hand....until the credit card bill comes of course. Some even assume that people with too many credit cards is financially appealing....unless they don't pay their bills on time. With credit cards, we find more justifications to buy stuff sometimes we don't need.

Credit Card issuers in the meanwhile make money out of interest rate payments. They encourage people to spend through credit cards in the hopes that users would delay payments and purchase more than they could afford. There's a malevolent factor to it because banks hate people like me who pay their dues on time and in full. They don't make a profit out of credit card users like me, that's why they encourage spending and attract people with lower interest rates to strengthen our culture of using plastic.

With the credit card reform that the US proposes, banks will be obliged to produce statements that reveal computations of the supposed interest rates the consumer would pay in the event they missed the due date. In short, banks would technically present to the clients how they would generate profit out of their delayed payments. With the knowledge at hand, users would be forewarned and start paying in cash. They would change the culture on how we rely heavily on credit cards. Happiness in spending would be altered. The culture of people on spending and using credit cards would be more vigilant, more cash intensive and more independent.

III. Company Accountability

Companies are created to produce something for their consumers. Banks should be financial allies of people, and not the institution who would destroy them. Before the financial crisis erupted, banks were wealthy, greedy and powerful. They created Credit Cards for everyone's convenience, but they do not explain fully how they are making money out of a person's bad decision and impulsiveness.

Credit card issuers should be vigilant enough to remind their clients to pay up. If it sounds too noble, enforcing interest rates should be realistic given the circumstances. With the unpredictable nature and financial glitches people face, the credit card companies should have thought of producing a buffer or a game plan. It's not always nice to be driven by greed by charging more interest rates until the person cannot afford to pay anymore. As the cycle goes on and on, all of us finally realize what the end product is.
In 2007, a group of Senators introduced a bill that would have required credit-card companies to state on each billing statement how long it would take a person to pay off his balance and how much it would cost in principal and interest should he make only the minimum required payment each month. (TIME)

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