institutions operate with little expenses and overhead, the profit margin that they are realizing is immense. Many consumers are being financially crushed by these exceedingly high and unfair interest rates and enslaved by the terms of the unjust contracts that they are coerced into. Consider the rapid growth and prevalence of payday loans stores, title loan stores and personal loan stores. 25% of the people in the US have negative or zero wealth, that is, their liabilities (what they owe) exceed their assets (what they own). 25% of the US population equals approximately 79 million people. These 79 million people struggle financially. And millions of these people are prey to the unjust interest rates of payday loans stores, title loan stores and personal loan stores. Many credit card interest rates are also unjust. In fact, it is doubtful whether any interest rate in excess of 12 percent can be justified as moral and certainly not in conformance with Christian principles. Many home owners are now trapped in mortgage contracts with high interest rates and are not able to refinance because of the restrictions by the banks. In fact, the vast majority of people who have had their homes repossessed lost their homes because the banks would not allow modifications to their loans?
Why are most interest rates and loan contracts unfair? Most interest rates and contracts are unfair because there is no balance between the benefits to the consumer and the benefits to the financial institutions. The economy thrives on consumption ; the consumption of the 315 million people comprising the working class and not the consumption of the minority capitalist class. Anything that constrains or limits the ability of the working class to buy homes, buy cars, buy furniture, buy appliances, buy food, buy healthcare, buy an education, or buy any other goods and services constrains, limits and reduces the activity of and the growth of the economy. If the constraints on the working classes’ ability to consume are great enough (as they are today), then there is minimal growth in the economy.
Most people think that inflation, an aggregation of price changes, can be controlled by the Federal Reserve System controlling the price of money to its member banks. That is not true. Only by government oversight and management can prices and inflation be controlled. Price management and interest rate management are first of all the responsibility of the owners of the businesses and banks. They have an obligation to the other members of the US economy not to set prices which are unjust and harmful to the economy. Of course, while most people will act responsibly, there are always people who will not. That is why the various levels of government through consumer protection agencies and the court systems need to oversee pricing and interest rates and correct unjustly high, unjustly low and extremely volatile prices and interest rates including the interest rates of the Federal Reserve Corporation. The various interest rates of the FED must have limits and sudden and extreme changes must be controlled.
Banks, mortgage companies and all other financial institutions also pursue a strategy of price maximization within virtually all markets through the deceptive practice of pseudo-risk. Banks, mortgage companies, and financial institutions use pseudo-risk to increase the interest rate or price of money both on new loans as well as existing loans? While there is a correct notion of risk which can be used as a basis for charging a slightly higher rate of interest, the current practice of assessing risk is unjust because it exaggerates risk for the sole purpose of charging a higher rate of interest, and in many cases a significantly higher rate of interest. Again, while objectively unjust, the individuals engaged in this practice or scam (for all practical purposes, it is a scam) do not consider it unjust since current economic theories hold that business practices and actions are amoral, that is, they are neither right nor wrong. But is should be clear that these practices are both unjust and un-Christian (contrary to Christian principles).
The current means of assessing risk is based on the credit ratings of the major credit bureaus and there are serious problems both with the scoring process and the credit bureaus themselves. There are four major national credit bureaus in the United States that allegedly measure a person’s credit worthiness: Equifax, Experian, and Trans Union and Innovis. These organizations are for-profit businesses that have a most significant effect on the ability of a person to borrow money and the interest rate that a person will be charged. In fact, these organizations have an almost absolute authority in deciding who will and who will not receive financing and at what rate since virtually every financial institution will make their decision to lend money, at what rate and when to raise interest rates all based on a person’s credit score from one of these credit bureaus. Clearly, these organizations are extremely powerful from a business point of view since they enable a financial organization to avoid potentially risky borrowers and also to increase profits by maximizing interest rates, loan fees and late fees.
These credit bureaus receive the vast majority of their revenues from financial institutions. Obviously, the biggest financial institutions are the largest customers for the credit bureaus. The credit bureaus want to make their customers happy. And the big financial institutions want to maximize profits. Financial institutions have been able to significantly increase profits by charging an excessively high rate of interest to a borrower because of the borrower’s credit score and through the tactic of raising the interest rate on an existing loan simply because a person’s credit score has changed.
While the process of evaluating a person’s credit worthiness can be objective and statistical, it is not. The basis used by the credit bureaus for assessing and changing a person’s credit score is mostly subjective heuristics or rules that they have developed to suit their goals. Of course, the primary goal of the credit bureaus is maximization of profits and since their profits come from financial institutions their strategy is to please the financial institutions by providing credit scores that maximize profits for the financial institutions. Credit scores can and should be based strictly on statistics. However, the credit bureaus do not want to rely on statistics to rate a person’s ability to pay since that would reduce the interest rates that their customers, the big financial institutions, can charge. And they want to keep their customers happy.
Credit scores should be statistically based and calculated by organizations that have no profit motive. A credit bureau must be independent and objective, fair and impartial. For-profit credit bureaus are neither independent nor objective nor fair nor impartial since they are in business to make a profit and they make their money from the financial institutions. They are clearly biased in favor of Big Finance. The only way to achieve independent, objective, fair and impartial credit ratings is to have the government take over the task of determining a person’s credit worthiness. For-profit organizations should not be allowed to provide credit ratings. These biased credit bureaus are also partially responsible for the current economic crisis since they have enabled Big Finance to raise interest rates and finance fees to the point where millions of people are severely constrained financially. Severely constrained consumers cannot consume.
Credit scores are meant to indicate a person’s credit-worthiness or ability to pay off a current or a new loan. A person’s ability to make payments on loans is based on both controllable and uncontrollable factors and these factors may be very temporary or extend for a longer period of time. A true credit score will estimate the risk to the finance company regarding the probability that a person will totally default on a loan. Total default means never, ever paying back the loan. If a person is unable to temporarily make payments on a loan because of unemployment, under-employment or illness that does not mean that they are in default. Unfortunately, finance companies are very quick to declare a person in default even though in fact they are not. Credit scores attempt to predict the future and there are many, many variables that need to be considered when estimating a person’s ability to pay. However, the credit bureaus do not take all variables into consideration.
If a person loses their job, it can take anywhere from four to nine months before they are able to gain comparable employment assuming a relatively stable economy. During this time the person is not able to pay all their bills. It should be clear that this period of unemployment and inability to pay bills is only temporary. However, finance companies do not care. They assume that the person’s inability to pay their bills is permanent. This is also the case for the credit bureaus. While it would make most sense to allow the unemployed person a deferment in their financial obligations, finance companies have no mercy
