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Defaulting On Your Debt

The Credit Scam

In order to determine whether to extend you credit, a credit card company checks out your credit report and current income to create a risk profile for you. With millions of historical data points at their disposal, they can predict with statistical certainty whether you are worth the gamble of extending credit.

And that's fine. Credit card companies are smart to determine how much risk they face if they approve your credit card application, and how high a credit limit they should extend. All of this makes perfect sense and is absolutely reasonable if credit card companies actually lent money—but they don't.

They extend credit.

See if you can follow this shell game.

The moment you sign a credit card application, that piece of paper is magically transformed from a worthless piece of paper into a negotiable debt instrument the bank can use. You sign a contract, and that contract instantly has value for the bank based upon the statistical similarity you have to the millions of people like you (assuming they decide to extend you credit).

The contract's value was not created from the exchange of money or goods or services, or in fact from anything other than your signature on a piece of paper. In fact, if you were to get a peek at the credit card company's underlying accounting ledgers you would see your credit account is actually recorded as an asset rather than a liability.

And the rabbit hole goes even deeper.

After monetizing your signature, the credit card company then lends the value you created back to you in the form of credit and presto—you have effectively just funded your own credit card account! If you have been looking for one of the eggs that hatched the chicken that created the recent financial crisis, here it is.

But we're not done yet! Now I want you to pay close attention. Nothing up my sleeves ... ready ...

The payments you make to the credit card companies are with real money.

Let me say that again in case you missed it: you pay your credit card bill with REAL MONEY!

Up until you start making payments, there hasn't been any real money used in this little shell game. At this point you should be thinking, "Are you $%&*! kidding me!!!" And to that I can only say, "I wish I was."

Credit card companies lend you nothing, charge you interest on nothing, and then take real money from you in the form of payments. So if you end up defaulting on your loan, the credit card companies are in most cases out—say it with me—nothing. Now, of course the credit card companies did have to "pay" for those goods and services you charged on the card, but remember, that credit was created out of your signature in the first place. Only if you default on the card does your balance become a liability. But, on average, most people end up paying multiple times what they borrow (as in the Smith family example above), so the card companies aren't really taking a loss at all. Add to this the tax write-offs, insurance, and the money they get from selling your account to 3rd party debt collectors, and they are doing just fine.

In short, credit card companies have it all figured out. They have rigged the system so that—like Vegas—the house always wins. The playing field is steeply slanted in their favor by their ability to create value out of your signature, use that value to fund your account, charge interest on that value you provide, and get paid back in real dollars.

> Fractional Reserve Lending
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