Have you ever wondered why banks push credit cards at every opportunity? Have you ever wondered how they can give you interest free credit if you pay your credit card each month? Have you ever wondered why banks tolerate such a high degree of defaults on loans? The answer is that credit card debt is very very profitable even with high default rates. Those of us who pay our credit card debts on time pay for these excess profits and pay for the bad debts of others. We can change the system.
Banks make money from merchant transaction fees, credit card interest fees, and account management fees. Any of these fees on their own would give the banks a handsome profit. Credit card interest fees are so high because banks push credit cards onto people who will never repay.
Any community can get rid of most of the fees and charges for credit by requesting the banks set up a system to stop credit card loan defaults, to reduce the cost of merchant fees and to remove the need for account keeping fees. It can do this by getting a bank or banks to create a system of interest free credit for its citizens for the exchange of goods and services. This can be done within the existing banking regulations and in a way that banks will still make a profit. If existing banks are not prepared to offer the community interest free credit then the community should create its own bank and use its own savings to establish interest free credit for its citizens.
Let us assume a community needs a billion dollars of money in circulation for day to day commerce. If the community deposits one billion dollars in a bank then the bank is permitted to create another billion dollars and lend it out. Typically banks lend the new money out for more interest than the interest they pay on the original deposit. The margin between the interest rates enables the bank to cover bad loans and operating costs.
However, the bank can make a profit from interest free loans if it can be assured that the money it creates from the loans does not move from the bank. That is the loan money remain on deposit somewhere within the bank. This money is then risk free and there is no need to collect interest to cover defaulting loans. The bank can still profit from transaction fees on the movement of money.
One way to do this is for the bank to issue a credit card with restrictions on the use of the credit. The credit can only be used for goods and services with other members who also have credit accounts with the bank. Any money paid from an interest free credit account must be deposited in another interest free credit account.
The system only works if members continue to use their credit account. To ensure this happens a member, on opening an account, agrees to continue to pay the supplier from the same credit account. If they stop paying the supplier through the credit account they agree to repay the credit. This would be enforced by the suppliers who would welcome such a restriction. If the system becomes widespread and is used by most suppliers then it becomes very difficult for a person to stop using their credit account for most payments.
With this system some members of the community will accumulate more money than they can use and others will run out of credit. Also some members will wish to purchase goods and services from people who do not have interest free accounts.
These problems can be overcome by members being able to sell interest free money and receiving in return interest bearing money.
With modern technology such a system is easy and cheap to build. Compliance is enforced by the bank because it controls where the money is transferred. Any community can institute a regime of interest free money. Such a system will remove interest on credit card balances and remove overdraft fees for businesses.
This approach is the same as Local Exchange Trading Systems but implemented with existing currencies.
The bank or other institution that sets up a system will profit from the transaction fees which can be set at a level to cover the interest cost plus a reasonable profit on the original deposit.