Tuesday, Ryan Avent wrote about credit cards, so I don't want to oversaturate people's interest, but I thought it might be helpful to understand just where credit card companies are coming from. And why those in Congress would really benefit from a class or two in basic economics. I'm talking to you Maxine Waters. Okay, she probably requires more than a class or two.
An example might help to better understand credit card companies.Let's say you're a kid and have two brothers: Jake and Howard. Jake is unreliable and irresponsible. Howard is reliable and responsible. Each asks you to borrow money. What do you do?
If you understand economics, you'd know that the risk involved in loaning each money is different. There is significantly more risk in loaning Jake money than Howard. That means that if you charge Jake more interest, you are likely to have a lower loss based on that risk. So that's what you do. You charge Jake 20 percent interest, but only charge Howard 5 percent.
The following month, you decide that, for some external reason that has nothing to do with the loan - maybe Jake lost his lawn mowing job or crashed his bike - you are more worried about Jake paying you back than before. You now tell him if he wants to borrow more money, he needs to pay 25 percent interest.
Jake feels persecuted, so he complains to mom. Mom says you are mean and can't take advantage of Jake that way. She says you can't increase his interest rate.
How would you react?
If you said, "Easy, I would choose not to loan Jake any money because I can't be sure that I'll earn a high enough return to get my money back," then congratulations, you understand credit card companies and probably basic economics.
If you said, "Mom is right. He's my brother, so I should treat him more fairly," then congratulations, you might be a member of Congress someday.
The interest rate increases that Congress calls "arbitrary" are anything but. Credit card companies have complex models that include dozens of variables consisting of different customer characteristics. After everything is taken into account, a rigorous, highly tested credit recommendation pops out of their risk management engine. They literally have math and statistics PhDs who are in charge of this stuff. Congress seeks to prevent such complex analysis.
Ironically, denying credit to riskier customers is the only way that credit card companies really can respond. By increasing regulation on how they manage riskier borrowers, Congress is forcing the companies' hand, and they will be forced to tighten credit on the very people Congress intends to help. If they cannot be compensated for the risk they're taking, then they won't take the risk.
Ultimately, Congress must make peace with their presumably unintended proclamation that those with poor credit are better off without credit cards than with credit cards that have aggressive terms and conditions. Right now, those consumers have the freedom to choose, but instead, Congress' "credit card bill of rights," will take that right away when the credit card companies are forced to tighten or deny credit to many of them in the days to come.
You left out part of the equation. Try that fact that credit card banks make more money on fees and penalties than they do in interest. Also that the industry term for people who pay their balance in full every month as "deadbeats". then there is the practice of manipulating the billing cycles, statement cycles, due dates and etc. to maximize the generation of fees and penalties. Dont forget that they probably shouldnt have given Jake a credit card to begin with but they did then proceeded to exploit him. Now that the recession is hitting and the Jakes are all defaulting they want to raise the rates and fees for the deadbeats who pay their bills on time. I agree with the result which is the credit card banks need to return to a reasonable business model even if some rates and fees are a little higher instead of getting fat on a model exploiting their customers with penalties and fees.
Daniel, cute analogy. One problem with it from my view: I too am Howard (actually I'm an exaggerated version of Howard because I pay my balances in full e-v-e-r-y t-w-o w-e-e-k-s. Thats 2 payments per month so that I do not carry a balance. Guess what!!!! I am exactly the kind of customer that credit card companies HATE. I guess that's why my interest rates keep going up and I get all kind of notices about how this and that service will cost me more.....blablabla.... your little example fails in the real world.
Are you / were you an economics teacher?
OV -
If you are "an exaggerated version of Howard" who pays his bills in full every two weeks, what difference does your interest rate make? They could charge you 50%, but if you don't carry a balance, you don't pay interest charges! Are/were you an economics teacher?
....missing the point: i'm not a risk to the cc company, but under the same interest bracket (risk bracket) as "Jake". Read Mr.Indiviglio's analogy.
OV, here's the problem. The credit card companies are in the business of LENDING money. That's what they do (and that's why it's called a CREDIT card). You do not borrow money from them, so you are not really using their product. It's like walking into a store and picking up several outfits, trying them on, and then thoughtfully folding and putting them back on the rack -- so polite and responsible! -- but you're not actually buying the thing they're selling. They let you stay because they keep thinking maybe you'll actually buy something someday, but you don't.
What you are doing is using a credit card as a charge card. A charge card (like those from American Express) is intended to be paid in full every month. Charge cards make money by charging an annual fee. It's only reasonable to pay something for a service that has value to you -- why should you get it for free?
Ever try to reserve a hotel room with cash?
I've reserved a hotel room with my American Express card plenty of times. And I pay Amex $40 a year for this service.
Don't any of you know how the credit card system works? Visa, MasterCard, American Express & Discover charge the MERCHANTS every time you use a card. The rate varies from 1.5-3.5%. Therefore, if a GOOD spender uses their card and pays it in full every month the card issuer still gets the "discount rate". So, a high-spender putting $100K annually on a card can generate up to $3500.00 in "discount rates" even without interest and fees.
That is NOT something for nothing, and why should that GOOD cardholder pay more so that folks who are financially ignorant don't have to pay their fair share? For some of these people who spend more than they can afford 28% interest is cheap! A pawn shop in Hawaii can legally charge as much as 240% (20% per month!)
You seem to be missing out on the other fact. Not only do credit card companies charge their cardholders, they also charge the companies that accept their cards. Even being a deadbeat they make money off of you.
I used to work for a bank and they have a debit/credit card. If you use the card as a credit card they make more money. So much so that when it first came available they had a "contest" where every time you used your card as a credit card you got a chance at a drawing for $1,000.
Independent and reality in Hawaii...
Just curious, who do you work for?
You've replied to ever other post made to this article.
I work for a large civil engineering firm. I play the credit card game. I don't take cards with annual fees. I make most of my purchases with cards. I pay my bills on time electronically so my payments are schedule and I (usually) don't miss a due date. I am fortunate to have the means to maximize my benefit and minimize my costs. I don't feel bad about being a CC "deadbeat". The CC companies get their cut from each purchase.
Personal responsibility is an important part of the equation. However, CC companies have a conflict of interest when it comes to facilitating personal responsibility among their customers. Personal responsibility = more deadbeats = lower CC profits.
My gripe is with the CC contracts. A good contract should be understandable and mutually beneficial to all parties involved. As it stands, I win at the CC game so long as I avoid getting caught up in the obfuscated contractual language that is beyond the comprehension of room full of Harvard trained lawyers, let alone a lowly engineer. CC companies make their offers and contracts intentionally unintelligible to discourage customers from reading the fine print and profit from the customers' subsequent lack of understanding of the contract. In a credit based economy, that is not fair business practice.
Let keep in mind that these companies need to make money. They will charge all the fees and the max rates allowed by law to meet or exceed what they need to cover costs. I used to work for one many years ago and most of the CC companies made their money on what we called "Revolvers". It didn't matter if they were a good payer or not... as long as they revolved, we made money... a lots of money. As margins got smaller, they needed to cover the spread differently... with fees. If their credit policy teams do their job, they try to find balance between risk and reward. The problem, many get greedy and approve accounts of customers with credit scores lower than typical to drive average daily balances the to meet portfolio margins needed. As loan losses increased they need alternative sources of income to cover losses....hence fees and higher rates. Secondly, CC companies want Revolvers, with the right balance of good and poor credit risk to round out their portfolios.
Question for you - you say CC companies WANT revolvers. Common sense would seem to dictate that should be the case. The more their cards are kept in a charged-up status, the more money the CC companies make, right? I have an acquaintances or two who have that unfortunate little tendency. If the CC companies want revolvers, why is it then that when these people tried to increase their limit or apply for a card thru a different company, the thing that shot them down was their "revolver" habit? I don't think so.
Bill, credit card companies want revolvers because credit card companies are in the business of lending money. But they don't want to make loans to people who have already borrowed too much money, because those people are at higher risk of defaulting on their loans.
Amen, brother
Something he also left out the credit card companies are also making up to an additional 3% on everything purchased from the merchant. The merchant even pays more for higher risk cards and they don't know who they are until the money is deducted from their account. So I have no sympathy at all for the credit card companies
They are making and average of 6% on almost everything sold in the world! Think about it!
Flash21 is right about merchant fees.
Who do you think helps pay for all the mileage or dividend cards. Your local merchant! And we don't even have a say in it - we're stuck having to pay whatever VISA/MC want to stick us with. The worst is the debit card - great for the consumer but I cringe every time someone hands me a debit card for a $1.00 purchase - with the fees on that piddly amount I've probably lost money.
As a merchant do I want credit cards to go away? Heck no!
As a consumer I want to play on a level playing field and have the card companies make up new rules as they go along. The biggest gripe I have is the payment due date, They process credit card transactions 24 hours a day, seven days a week. It doesn't matter if it's a Saturday or Sunday. You'd think they could do the same for payments, but that levels the field and they're not interested in that. No, they LOVE the deck stacked in their favor.
If some people can't get credit cards that's okay. Not everyone deserves a credit card nor should many people have one. Make em' use their debit card (I know, I hate them) and don't let them overdraw their account.
Exactly the problem is that when you lend money to your unreliable brother, particularly at usurious rates, you create a problem in the aggregate system (particularly if you are able to obfuscate that risk by packaging and selling ABS). This is exactly what was at the core of this credit meltdown.
The aggregate problem is this. If the FUNDAMENTAL risk of each individual credit underwriting decision is not sound, then the aggregation of those risks is fundamentally unsound. The net effect is to use credit issuance as a sort of ponzi vehicle (if you include mortgages, a multi-trillion dollar ponzi vehicle). When these ponzi shares permeate the broad market, like a virus they eventually have the potential to kill the host (which is exactly what happened in the present crisis).
I'm Howard, the reliable one, with excellent credit, a mortgage that is paid regularly and on-time, etc.
So, dude, where's my 5% rate?
Sorry-Obama wants good folks to subsidize the flaky. Being reliable and honorable is no longer a virtue in the current government-think. So you get a 15% rate while you may deserve 5% so that your over-spending neighbor can also get a 15% rate even though he or she should be paying 25-30% based on their risk.
INDIVIDUAL RESPONSIBILITY has gone out of style.
If you said, "Easy, I would choose not to loan Jake any money because I can't be sure that I'll earn a high enough return to get my money back," then congratulations, you understand credit card companies and probably basic economics
Or you could act like the credit card companies and raise rates on his existing loan. its not an issue of charging higher interest on new debt, nor is it an issue of restricting future credit. The problem lies in not telling Jake you are raising rates on previous credit you gave him, or changing the rules midway through paypack. No one would argue that credit companies should be able to charge new rates on new loans, or restrict new credit but altering existing rates, or the various nefarious practices they are accused of in reference to billing practices. Those should be stopped. Credit cards are a luxury, unless you actually want to participate in todays economy, like buy a house, rent a car etc.. then its more of a requirement.
The one important thing that everyone commenting on this is missing is that credit card "loans" are given on a monthly basis. The loan is a one month loan and is due at the end of the month! If you carry a balance you are in effect taking on a NEW LOAN. Every month CC companies have the right to change the terms of the NEW LOAN. Try reading the card agreements before running to the mall to buy stuff you can't afford (all the fees and the rates are specifically laid out). If you don't agree with the terms or to don't understand the agreement DON'T USE THE CARD!!! Nobody is forcing you to use the credit card. I can't believe everyone is this country that wants Uncle Sam to hold their hand. It is absolutely disgusting.
Thank goodness someone else understands how silly Uncle Sam is becoming. But the financially ignorant and those who want to live beyond their means are the core voters of the Democrats, so Obama has to "protect" them, and screw the rest of us.
The Jake and Howard story is leaving out part of the equation. Jake can't pay his bill on time or only makes partial payments so how does the nice credit card company solve this problem. Easy, slam Howard with higher interest rates to cover Jake! Hey, that worked out well. Darn Howard pays on time so lets set the due date time at 10:00am even though the mail comes at 4:00pm. Great, Howard is late and a dead beat. Let's slam him some more. Wonderful, with all the extra money we make from Howard, let's find more like Jake and really slam them. This is wonderful. We can make huge amounts of money from Howard and truck loads more from more like Jake. Wonder what else we can do to Howard?
First I'll admit I do not have a thorough grasp of the new legislation, or a degree in economics.
But from what I've read, the problem Congress is trying to solve is CC companies charging you interest on a balance ... then changing the rate on that balance.
In your analogy it would be as if Jake told Howard he would lend him money at 20%. Howard then takes a loan at 20% interest. But then Howard loses his lawnmower job. Is Jake then allowed to say well you owe me 30% now instead of 20%?
Credit cards should be contractual: if they lend to you at that rate, they should be held to that rate for a period of time. But they're not and that's what I find arbitrairy.
Credit cards are contractual, you have to sign a contract to have one and every time it changes they send you a new one. If you don't like the new term you can cancel the card right away. One of the terms is that they can change the rate to whatever they feel like for any reason what so ever. Like other people have been saying if you don't like the term don't get a credit card. It's really not that hard.
That's a nice narrative, but it doesn't describe what happens if the kid, (let's call him Cappy) is a rent seeking bastard.
In that model Cappy has a separate equation to maximize profit. In the model Cappy picks the brother who is poorest at math, say Howard. Cappy sees that Howard is poor at financial management and decides to bleed him not based on creditworthiness but on ability and willingness to pay. Cappy sets Howard up with a low teaser rate then makes calculated changes to the rate later. Cappy also knows that Howard is bad with dates, and regularly changes Howard's payment deadline to extract additional revenue from Howard. Cappy doesn't mind - what's Howard going to do, go to the local loan shark?
Scarlet, since your Howard is so "poor at financial management" and so "bad with dates", maybe he shouldn't be borrowing money until he learns how to manage his finances responsibly.
Independent is a funny name for you as you speak like a slave to Amex.
Kong, I speak like someone who believes that each person should think for himself and take personal responsibility for his decisions in life. Get it? Independent?
Kong, I speak like someone who believes that each person should think for himself and take personal responsibility for his own decisions. Get it? Independent?
No, "Independent", I don't get it. I still think that "System Slave" or "The Man" would be a much more fitting name for you.
OK, Kong, you can call me "The Man." I kinda like the sound of that!
And let's see, what shall I call you, "Kong"? How about "The Big Monkey"? Sounds about right for someone who is in favor of "Democratic Communism"...
And remember what happens at the end of the movie when Kong tries to match wits with The Man... ;-)
Nah, I think SLAVE is a much more fitting name for you.
You can think whatever you want, Kong, it's (still) a free country. But unfortunately thinking things through doesn't seem to be your strongest talent.
Very accurate. If you are poor a financial management you have no business having or using credit cards.
This was a nice and simple article but does not seem complete. You fail to mention the $50 or so a credit company will fine someone for being even a day late. This seems far above and beyond the actual damage suffered by the credit company for such an inconvenience, especially given the interest rates involved.
You also do not say and I am not sure I understand.. does a credit card company also change the rate of money _already borrowed_ based on the principal of universal default, that is, based on late payments elsewhere? I was given to understand this to be the case. If so, then doesn't a bad risk become at least partly a self-fulfilling prophecy?
Realizing the principles of higher risk leading to higher interest rates, perhaps the credit companies have simply gone far overboard, modeling a business on unreasonable profit models?
This article is a load of crap. As an example, my mother who is 78 years old and has a credit score above 800, recently had her interest hiked to 18% because the credit card company claimed her payment wasn't "processed" in enough time; even though she sent the payment in TEN days before it was do. She has never missed a payment in her life, she is old school about owing money. I've ben fighting now for two months to get these "deadbeats" to correct themselves and now have to hire an attorney.
Regulate them? Heck, we need to hang them. This article shows that Daniel, the author, is nothing but a poorly paid lackey for the credit card companies.
I agree with the above comments - you totally miss that there are other money making mechanisms, and the fact that credit card companies can simply hit up other folks with more fees, etc.
Long time ago in mid eighties, when I was growing up in a village in India, the inflation was almost always in double digits. As many in the middle class, my family had a maid. Once she asked my mother for a loan to pay back a loan shark. I asked her how much interest she paid for the loan. She paid 3 rupees per month for every hundred rupees she borrowed. That is 36 percent per anum. Even as a teenager, I was shocked at the time. After reading your blog, I decided that it is futile to convince you of anything other than your faith. I mentioned the story of loan shark so that others who come here can compare a loan shark in rural India to reputed banks here, and come to their own conclusions. (BTW I am a mathematician by profession, one of the very group you invoked to bolster your argument)
I once owed 39.9% on a credit card. I DEFINATELY think that the credit card company was nothing more than a loan shark.
Man, I'm a little to the right of Attila the Hun when it comes to fiscal policy but I can't even defend credit card companies. Give me a break. A credit card company isn't a family member. It's a loan shark. They're more like the obsequious little rich kid up the street who keeps his goon from across the tracks to handle the dirty work. Your analogy really looks more like this in practice: You hear both brothers need money on the street. You then call them up and offer them more money than they need. When Jake looks like he might actually pay you off, you send him some more and suggest he go buy a new toy. Then you do it again. You recreate this scenario a thousand times. When he's a day late getting you your money you double his payments for the rest of the loan and, oh, here's some more cash. When Jake quits paying you call everyone he knows and tell him what a deadbeat he is and when he doesn't pay, you send your goon to collect, but, HEY!, you don't care, cuz you've got 50 other Jake's to harrass to make sure your monthly cash flow is there. And don't forget Howard! You're trying to do EXACTLY the same thing to him! That's more what it looks like in practice and this kind of crap is what government is actually for. Those companies are evil and you know it.
Brannon, you probably think that it's McDonalds' fault when people eat too many Big Macs and get fat, right?
Come on. we're all adults here. Jake should man up and not borrow more money than he can afford to pay back. Personal responsibility, man.
If you can afford to repay your loans don't borrow. SIMPLE!
Daniel- You are exactly correct that all credit card companies can do is deny credit to riskier customers. The point you are gravely missing is that they penalize the good customers and have immoral business practices. Government is not trying to offer credit to these risky parties but to better monitor how credit card companies are manage their existing client base within honest business practices.
I suggest your write the full story next time.
I agree with the comments above...Mr. Indiviglio is telling only half the story.
I have had a card with a major company for more than 20 years...never late, hardly ever a balance.
A couple of months ago I "buried" a charge of under $100 in a pile on my desk and ended up paying it three days late.
BAM! I was hit with a $75 late fee and my rate jumped to 28%.
I cut up my card, placed it in an envelope with a letter to the company's CEO explaining what he could do with it, and moved on.
A week later I received a phone call from a corporate VP apologizing, waving the fee and rate increase, and begging me to reconsider. I did...not because I need the card but it is a convenience in some situations.
Lesson...be just as tough with them as they are with you.
"Right now, those consumers have the freedom to choose, but instead, Congress' "credit card bill of rights," will take that right away when the credit card companies are forced to tighten or deny credit to many of them in the days to come. "
Don't worry, I'm sure Congress will just pass a law making it illegal to deny credit to poor credit risks. Problem solved. Right?
Welcome to American Socialism. Personal responsibility and living within your means are out of style.
Living within your means was out of style far before Obama and so-called American Socialism. I would say it has been the essence of the American economy since the 1950's, when the American dream and consumerism became one (funded by the world by means of the great almighty dollar).
I am not sure what you call socialism but personal responsibility in social democracies is called voting. Personal responsibility in your ideal society is called buying. I'd rather choose by voting than choose by buying.
Daniel,
Thank you for trying to defend the credit card companies. I appreciate the perspective. Using your story as an example, I can definitely understand why a lender would want to raise interest rates when unforseen risks arise. Heck, they have to eat too.
I think the other replies to your post point out the fundamental problem with this model: Borrowers get no stability. In reality, both good and bad lenders suffer rate hikes during times like these. These hikes make it very difficult for people to budget, and ultimately exacerbates the problem.
I think the better model is to have fixed interest rates that take into account potential future risks. Do away with low teaser rates that are bound to be increased eventually. 14% fixed-APR over the borrower's lifetime is probably better for the economy than fluctuations between 5--29% every 5 years.
Chris, good point. i think that's the direction the industry will be going, along with an annual fee for customers who pay their bills in full each month.
Interesting article but the fact is that credit does not HELP people who can't afford to have it. Haven't we learned that from the mortgage crisis? Extending credit to people who ultimately cannot afford it ends up costing everyone.
Credit card companies NEVER have your best interest at heart. Previously banks extended credit so that they could sell you other services but now that "credit" has become a money making industry you can forget it being a "benefit". If you can afford to pay your card off every month just buy the items in cash. If you cannot afford the item then you can't afford it. Once we realize that the CC Companies are not FOR us then we can handle our lives better.
Excellent post. Those who live within their means and pay their bills on time are now being penalized to cover the deadbeats. If you can't afford it DON'T buy it!!
I have no degree in economics but one thing I know that in every business, all the losses are payed for by the consumers. That is why I credit cards are always increasing their rates no matter what, it's just who the heck pays for the bill. There should be a law that if a credit card company send you an application without asking for it like in the mail, we should be able to return all those mail because frankly I'm sick and tired of receiving all of these junk mail.
There is a new thing out called a shredder. Get one and just shred mail you don't want. Don't ask to restrict my mail because some are to weak to resist an offer. OR, you could mark the mail "return to sender" or "refused" and return it to your postal worker.
reallity in Hawaii: it's suprising how much you are ready to compromise, and how much efforts you seem willing to make for people that have no respect for you whatsoever. Do you really think this way of life makes people happier?
Yes, the credit card companies could deny credit to riskier customers. But they don't do that. They extend them credit on onerous terms and encourage them to default. The business model isn't to make money earning a piece every transaction, but to earn based on high interest rates, which they can only get by encouraging default.
I understand how riskier customers should get higher rates, but I fail to understand universal default. Raising the interest rate makes a person more likely to default, not more likely to pay. If they have any real notion of their self-interest. The model has been for some time dependent on their customers not understanding the terms of the deal.
Credit card companies deal with large numbers of people so you model how they act with statistics and stuff. Credit card companies want to maximize profits. With a single person they either default or not so raising their rate is a risk. You might make more back or you might get nothing. But with a group it is very different. You can predict what percentage will default at any given rate. So credit card companies simply do the math and determine what interest rate result in the largest profit for them. There is nothing evil or sinister about this. It is public knowledge that this is how the system works if you don't like get a debit card.
I am wondering why Credit Card Companies don't prorate interest rate on daily basis and chraging extra based on number of days, instead of charging late fee, penality, rate hike etc. If the Card Holder deliquent past 90-180 days take other actions as required under the federal laws.
Pay your bills on time and then don't worry about extra fees, etc.
In the real world, the two credit unions I'm with have had fair & honest business practices. I did drop one of those cards, because I really felt I didn't need it, not because of their business practices.
It is interesting, since I also carried some other bank cards at THE SAME TIME, during some of those years, and that the shenanigans they pulled don't square with the idea of risk assessment. They do square with the idea of greedy companies.
Either that, or I’m actually two different people. Sorry don’t buy it. Who is it that needs an economic course again?
Rexwine, why do you think it is strange that two companies would have different evaluations of your future risk potential? That's the nature of a risk model -- it's a prediction about future behavior.
One trader bets the stock will go up, one bets it will go down. One guy bets the team will cover the spread, one bets it won't. One analyst predicts you will won't default on your loans, the other thinks you might.
I think his point is that it completely undermines Indiviglio's arguments that these rates and fees aren't arbitrary -- that in fact they're "complex models," "rigorous [and] highly tested," by "math and statistics PhDs." Ooh! It sounds so authoritative!
If in fact they're just gambles, akin to those placed by sports bookies or stock traders (arguably even worse than the bookies, with results famously no better than random picks), then they are *indeed* arbitrary. Consumers should not be subjected to that, made the pieces in that game... and thus it's a completely legitimate area for government to step in and establish some ground rules.
Chris, I see what you're saying; good point.
I would disagree with one aspect of your post however: predicting future consumer behavior, markets, etc. is a big part of any business, and the fact that predictions about the future are not always accurate or consistent does not necessarily mean that they are arbitrary.
And all of this begs the question... Do Credit Scores really measure the risk of loaning money? Where are the studies that back this up? Maybe they exist, but I can't find them.
Credit scores have a huge amount of error built into them. I once got a loan from a company that refused to cash my payments. They would return them to me, and despite the fact that I could prove to anyone (I use a bill pay service so the fact that the payments were mailed to them is beyond question), a series of 30 day late and 60 day late events are on my record. I have disputed these events, but they get backed up. Because the company in question can show that they "didn't get paid", i.e. they didn't cash my payments. When I realized what was going on, I made sure to pay off these idiots in total.
And this is only one example. Every reasonable creditor I have is paid on time every time. But a hand full of idiots and a bit of identity theft has tarnished my credit. And no amount of disputes seem to fix the issue short of taking people to court. And I haven't the time or inclination to do that.
I can't be the the only one in this situation. But it doesn't get fixed because it doesn't hurt any business. A lower credit score means a host of businesses can charge me more money. And there is no control... i.e. everyone will charge me more money, so there isn't anywhere I can go.
So I await any kind of study to show that these credit scores have any meaning. I can't see how they do.
This is a difficult issue, and like Obama, Kerry, and probably most every other politician out there... I haven't read the bill. I do, however, have an adequate understanding of economics.
In my opinion, the crux of this issue is the nature of a contract. There are several types of card agreements out there. Some are fixed rate (always cost 9% no matter what). I've never had one of those. Some are variable based on an equation (Prime + 6%). Others, which are being complained about right now, are completely variable. Each of these should explain their model in your contract. The bit that I'm stuck on is intentionally complicated contracts. No one reads everything their credit card company sends them. I don't. On the one hand, I agreed to the terms, which they are now taking advantage of, so bad me for not being more careful. On the other hand, they sent me a hundred pages of contract knowing I can't read it all. I suppose what I should do is flat out deny any contract too long to read. I wish congress would reject bills for that reason. Still, I'm on the fence.
Some other facts about credit cards:
1. Credit cards get 2-3% of every transaction from the seller, so they make gigantic amounts of money before you ever get interest. If I never run a balance or get charged interest, I am still a great customer, because they get 3% of everything I buy.
2. Everyone know credit cards are risky. We all know that having a balance is bad. Credit card companies can be dishonest at times, but we knew it was coming and should have been prepared.
3. Credit is not a right. Credit is where we want to buy things that we can't afford and ask other people to give us their money to do it. The creditor gives us their money on their terms. If we allow ourselves to be in debt to entities, which we don't trust, then we have created our own fate.
Credit is right and necessary. Most Americans could not EVER buy a home or a new car if there was no credit. MILLIONS of people would loose their jobs (either blue collar jobs because people could not afford to buy if there was not credit available, or white collar jobs associated with the lending of credit) if there was no credit available. Remember, that ordinary loans are a form of credit too, not just credit cards. Credit allows us to pay for very expensive things over a period of time rather than have to wait (potentially for decades) to purchase something with cash. Could you imagine an America where everyone had to pay cash for a car? We would be like Cuba where everyone was driving around in 30 year old cars on their last legs. Having no credit would be a disaster.
Credit is a business arrangement and mankind got along fine without it for the majority of history. I have only every used credit to purchase one of my cars, and it was a mistake. I have taken advantage of credit to buy a home, though if I were forced to rent until I could afford to pay for one in full, that would be fair.
The inescapable issue is that when you accept credit, you are asking for money which is not yours. If you do not take that credit on the creditor's terms, then you are a thief. Remember Office Space, "It's not yours? It becomes ours... How is that not stealing?"
Cuba is a poor country due in large part to their communist government. My wife bought a car in case at the age of 20 using a waitress's salary. Thousands of Dave Ramsey listeners manage very nice cars and lifestyles without credit as well.
First of all, I am talking about the average person, not the exception. Like I said, if every person was like you, and only bought a car that they could afford to pay cash for, millions of fewer cars would be sold every year -this is true for everything not just cars - and therefore less would be sold, and millions of people would be out of work. I think it is fair to say that the vast majority of people who purchase new cars (or anything of significant value) don't pay cash.
When you use credit you are barrowing, but that doesn't give the lender the right to exploit you. There is a BIG difference between ethical lending and exploitative lending. We should not just accept that a lender can charge whatever they want. There are (or were) usury lending laws in this country to protect borrowers.
I am glad that there are so many Ramsey listeners who can afford to go through life without ever having to borrow money. What about the other 99% of America? Should they just live in a cave and wear burlap sacks and eat dirt? C'mon. Credit is a necessity in our economy. If money is fairly lent it allows tens of millions of people to purchase things that they might never be able to afford otherwise and provides millions of jobs. It is one of the critical inventions that made our nation the richest in the world.
There's a diferrence between 'credit' and 'mortgage', Jeff. Sure, borrow money on a home which (in a working economy) will sustain the value of what you borrowed. However - borrow money for a CAR? A STEREO? A PHONE?
If you can't afford it - do without it.
First of all, credit is defined as "money available for a client to borrow." It doesn’t matter if this is borrowed from a credit card or on a mortgage. What you are arguing is secured vs. unsecured lending. Both are a form of credit.
Second, Have you seen what some cars sell for, they cost as much as homes. Ever try to pay cash for a Ferrari? Some cost more than $600,000. And before you say "well then people just should not buy these things" remember that millions upon millions of people are employed making and facilitating the purchase of these "unnecessary" things. Almost anything that you can't afford to pay cash for can be considered "unnecessary". Does that mean that we should all just live like Quakers? Fair lending allows anyone who uses it to live better. Exploitative lending destroys hopes and dreams and lives. Ethical lending is one of the cornerstones of any great economy. No great nation can do without it. Every great nation owes it to their citizens to protect them from exploitative lending practices
Jeff, there are 60 people who make Ferrari's. They do so only in Italy, where those 60 people make the parts by hand and assemble a pre-ordered, pre-paid for vehicle. As far as the automobile industry is concerned, Ferraris ARE 'unneccesary', and I'm sure I'm right in saying if you can afford a Ferrari, you certainly don't need to take out a loan to pay for it.
There's no such thing as 'fair lending'; lending is for profit, and borrowing is for convenience. Fair doesn't enter into it.
If you believe that ANY form of lending (apart from mortgage loans) leads to the success of an economy - well, you're living in a different reality to that one where most countries are struggling as a result of it!
Nobody wants you to live like a Quaker, Jeff, but once you've failed to make a payment on your 'credit' card, you might just find yourself forced to ...
Credit is not a right. This is especially true for credit cards.
Loans for autos and houses are a very different. Those are secured loans--you don't pay and you get your car repo'd or house foreclosed.
Credit cards are Unsecured loans. A bank cannot repo the dinner and drinks or designer clothing you couldn't afford but "deserved".
Steven, one clarification: regarding your point #1, the percentage of the transaction that comes from the seller (what the industry calls interchange) is not a great source of revenue for the credit card lender. Much of that goes to maintaining a worldwide real-time authorization network and dealing with the costs of merchant processing. There is actually a second bank involved, the one that processes the transaction for the merchants (and provides the authorization terminals, etc.) and they have to get paid. In addition, part of interchange goes to pay MasterCard or Visa for maintaining and advertising the brand, setting standards, marketing, etc. So unless you charge an unbelievably large amount on your card, the interchange alone is not enough to make you a profitable customer.
To understand credit card companies, you have to repeat over and over again, "Credit card companies are in the business of lending money."
Credit is a concept and a business practice. You don't have the right to have someone or some business entity extend credit to you. However, because the credit score is now used for things not directly linked to the issueance of credit (like card insurance rates and employment screenings or being able to use credit union service centers) I believe that everyone should have the right to know their credit score without paying for it. The annual free credit report should include the credit score and how it is calculated.
How can people be expected to maintain good credit when good credit is based on a score that they don't have access to?
By the way, I'm a deadbeat to the credit card companies - always pay in full each billing cycle.
Very happy to see someone else understands the system. Credit is not a right.
Who needs more than one lesson? Rewrite your article to answer all the criticisms the commenters have provided and maybe you can prove that you aren't either in need of a brain transplant yourself or in the pocket of the credit card companies.
A sister for these two brothers, named Sue, decided not to borrow anything at all. Instead she decided to only use the money she has and to save up for larger purchases. She has a fabulous, but unused credit rating and doesn't care very much how good or bad credit card companies are. How do you think her life will turn out
relative to her brothers?
Sue would be an exceptionally wise person, who would have a stable and prosperous future. She would then have to pay higher taxes to bail out everyone who made poor decisions.
. She has a fabulous, but unused credit rating
wrong she has no credit rating (sometimes worse then a bad oone) and cannot buy a house or rent a car.
There are plenty of ways to earn credit. You don't have to have a credit card to survive. I bought a house a year and a half ago as well as own a brand new car and I don't have a credit card to my name.
So the house and the car was financed on your husbands credit? Your parents' credit? Was the house in Detroit and did it cost $1,000.00?
What I'm saying is that you don't need a credit card to gain credit. Paying bills on time, getting a cell phone (if done without credit they will ask for around 300-500 dollars down), financing small items all generate credit. Sure a credit card will speed the process up, but is by no means required. Just because you needed a credit card to buy things you couldn't afford doesn't mean you should look down on me for being able to accomplish the same things without the credit cards. I built off of the small things, which gave me enough credit to take small loans out from the bank. Eventually, after enough small loans were paid off in full and some even early without late payments or missed payments, they started offering larger loans. I'm telling you that you can survive without credit cards.
I don't know what state you live in, but where I live you don't get any credit points for renting or paying your bills. It just seems like you're removed from reality.
Sue will end up living with her parents because, lacking any kind of credit history, she won't even be able to rent an apartment.
Hey now, give Sue some credit. With the naive outlook that you don't need credit to go far in life, she might end up with a great life, traveling with a circus! ...Or, alternately, on some Manson Family commune in Nevada.
Homeless and unemployed living in a fantasy-world in another age when credit was not a requirement in the modern world.
as long as she does not attempt to buy a car or a home, she will be fine. If, however, home ownership is a goal, she better get a credit card and live with the misery. If she wants a car, ditto. Because right now Sister Sue has NO credit rating, and as such would not be considered for either the car or the home.
Sue will not borrow money to buy a house, so until she can save $100,000 or more for a first house, Sue will try to rent an apartment. However, with no credit history, she will not find anyone willing to rent to her. Without a residence, she will not be able to open a bank account, so she will have to keep all of her savings on her person in cash. She will be well-known to local criminals and will frequently be mugged and robbed, which will prevent her from ever reaching her goal of saving enough to purchase a house. Sue will suffer dementia from repeated blows to the head received during the muggings. She will lose her job and turn to prostitution. She will be shunned by her family and will die of disease at an early age.
>
I don't know Freon. You make it out as if Sue will be some kind of anomaly. Look around you. This is not a rhetorical scenario in today's America. This is HAPPENING to hundreds of thousands of people TODAY. Let us pray for Sue that she never gets to this condition.
While I agree that the interest rate increases aren't exactly arbitrary in why they assess fees, they are definitely designed to penalize people at their most vulnerable. A perfect example is my girlfriend who has held a credit card with a retail store for years. She doesn't make a lot of money, but until a few days ago, she made every single payment on time and paid more than the minimum. She is trying to get out of debt, albeit unsuccessfully.
So she missed a payment by a day. The card company charged her $40 for a late payment, $39 for some mysterious "processing" fee, and another over-the-limit $40 fee because the fees put her back over her credit limit. Please explain to me a) exactly what equation a statistician decided to use to assess $120 worth of fees and b) how this is even remotely fair to someone who has had a long history of paying their bills on time. It is simply predatory, and to defend any single entity who does this to people on a daily basis is akin to defending a loan shark.
Worse. Loan sharking is illegal. This preditory lending is perfectly legal. The people who run these companies are considered captians of industry and pilars of the community when in reality they are disgusting crooks.
I am not an economist, but a mathematician too. I agree with the above statement that the credit card co.'s behavior is not explained by charging sufficient interest to cover risks. If I worked for such a bank, my job would simply be to maximize profit in any legal way. This is like applied game theory, where the bank's opponent is the consumer. For example, why not randomly spike interest rates on busy card holders throughout the year-- based on how often folks read the fine print and call to demand an explanation: bingo! more money.
Everyone who deals with Realtors, Mortgage agents and any other agent who will profit if you pay to much for a house or to much interest needs to treat the other person involves as an "opponent". Bring your own calculator to any deal and do all the math yourself. (I saved $4000 this way at a closing. There are plenty of places someone can accidentally charge you twice, for example if you pay a fee upfront it may also show up again at closing. )
This simple story would be all cute if it was true. Congress is not trying to prevent credit card companies from charging their customers interests that are based on risks, it would be against economic principles and, as you say yourself, plain stupid. You are misinforming your readers, although not many believed you based on the comments above. All the regulations congresswomen and men are trying to adopt are aimed at improving contracts between CC companies and their customers: making them simpler, clearer, more visible, more understandable. In a few words, the new regulation does exactly what your 'Jake and Howard story' does: it educates people by telling them what they owe and why when they borrow money. Apparently you need a class or two as well, because one of the pillars of free market economy is transparency of information, which credit card companies have been denying their customers. You know very well how they have been making most of their money over the past decades, and it is not by figuring out smart mathematical models. It is by screwing up the segment of their customers that are the most uniformed and uneducated. Wouldn't you want government, if it has any purpose at all, to protect the most vulnerable among us by offering them the means to defend themselves? Or maybe you stand on the greedy side, and think that you need people to stay uninformed and uneducated to maximize your profits...
I wholly agree. A key to surviving in a free market economy is being informed. Attempting to trick your customers is unethical at best.
Uninformed and uneducated people have no business getting into contracts they don't understand. Either get a lawyer, friend, accountant or other help OR don't sign the contract.
If you don't understand the terms, no matter how complicated, you simply have NO business borrowing money or using credit cards.
I really do understand everyone's points of view, but how does it help raising interest rates on someone who is unable make payments at 20% an interest rate of 50%???
When I worked for one of the biggest credit card companies in the US, management used to brag about how much money we'd make, even when they sold uncollectible debt to a collections company. After raising the rate multiple times and charging insane amounts of fees and penalties, debt sold to third party collectors, even at pennies on the dollar, more than made up for the initial purchases made by that consumer.
The author is ignorant at best and crooked at worst. Credit card companies are undeniably unethical and the only reason their practices are legal is because they have teams of lobbyists who managed to get the usury laws (and myriad other laws) changed over time to legalize their predatory practices. Our company had special teams employed to talk to customers who called in to pay off their balances. These teams would throw every weapon available at cardholders to prevent them from paying off--cash advances, lowered rates, payment holidays, etc... Credit card companies (like most publicly traded companies) exist for no reason other than to make a profit. The difference between most other industries and credit card companies is that the credit card banks have managed to re-write the laws so that the consumer has little or no say in the way that credit works. This is the reason that the industry fought making credit scores known to consumers, fought making disclosure of time to pay off based on minimum payments and will continue to fight any law that’s good for consumers. The more we know, the less profit they make…
Please explain why it is the card companies responsibility to tell you how long it will take to pay off your balance? If all you are paying is the minimum each month you are over-extended and are lucky to have any credit at all.
Paying your credit card bill isn't hard if you only spend what you can afford.
No, I don't work for a credit card issuer. Several different entities issue credit cards: some are companies, some are banks or credit unions).
I didn't say it was CC Co's responsibility to tell a consumer how long it will take to pay off a balance. I said they fought this legislation because it was good for the consumer, especially those not as savvy as you, and ignorant customers were our best customers. Therefore keeping them ignorant at all cost was a key strategic initiative.
RE: "have complex models that include dozens of variables consisting of different customer characteristics"
And these consist of ?
Most likely whatever data can be mined about a person. And if the person uses cheap toilet paper, they probably can't afford to charge anything and pay it off.
Give me the complex model of "Jake & Howard".
My jaw literally dropped on the floor after reading this one. I signed up for an account just to reply to this.
The idealistic model described in this snide little gem is truly how credit SHOULD work, and probably IS how credit worked a few decades ago, you know, before they started mailing credit card applications to 16 year olds. But if the author truly believes that is how credit works, he must be living in a cave on Mars with his head up his ass.
The most audacious little bit was this:
"They literally have math and statistics PhDs who are in charge of this stuff. Congress seeks to prevent such complex analysis."
That explains it!! Magical math (AND statistics!!) PHD's are the ones who jack up your interest rate 15% when you are late on one little payment!! I wonder which probability model they are using to calculate that one. The binomial distribution? Hypergeometric? Pareto?
It used to dumbfound me when they would hike my interest 15% because my payment was caught up in the mail and ended up being a few days late, especially when I make payments on time regularly and still have outstanding credit. Was I really that "risky?" But now I know it's beyond me because they are using big fancy probability density functions and statistical models I don't understand.
Math (AND statistics) PhD's are also the ones who calculated those $40 late payment fees. And they are why a $40 over limit fee is charged when you go over your limit rather than just denying the card. Those Einsteins are also why you get your bill one week before it is due!!
And shame on our irresponsible commie asses for wanting legislation to prevent these free market practices that were created by math (AND statistics!!) PhDs!! Getting pissed off when credit card companies weasel billions of dollars they did NOTHING to earn from the hard working people who earned it is like a 4 year old running to Mommy when she falls and scrapes her knee. My eyes are now opened.
Yes, and those PhDs calculated those rates and fees to maximize profits for the company without regards to consumers. As long as enough folks kept borrowing, they'd stack on more and more fees and ways to hide what they were up to. Then, like the derivatives mess thought up by those same PhDs, the house of cards collapsed.
Usury was once illegal in the US. I have fun showing folks in Japan some of the real interest rates charged by US credit card companies. Most are shocked. Those types of charges are the things sleazy small-loan companies---often in trouble with the law---and loan sharks do. In the US we have silly people like the author of the article who think it's all hunky-dory.
I think in their quest for profit they forgot one thing: Good Will. Treat the customers badly and they will go elsewhere.
My wife and I have already decided to save up for a house once she gets her degree and buy it flat out with cash. We'd rather waste money on Rent for a 5 or 6 years than make interest payments on a mortgage to a bank. We are just that sick of them and their schemes and scams. That's probably $150000 they are losing from me in would-of-been interest payments, just because we just can't stand them. They have probably burned me to the tune of $1000-$2000 from fees and default interest on credit cards the last couple of years, but they're losing $150000 because of the bad taste they left in my mouth. How's that for profit maximization.
Man - good job of not thinking that totally through. As far as what you said, your facts are correct. However, you are not taking into account that while credit card companies do justifiably and correctly practice price discrimination, those same companies have also refined predatory lending to a fine art.
For example, have a dispute with the phone company, who then inaccurately and incorrectly reports you as delinquent on a phone bill, and watch your credit card interest rates soar in a case of "universal default."
Or have one of those [sarcasm] perfectly accurate and 100% above board [/sarcasm] collection companies get your name - for something not related to you - and the same thing can happen.
At one time, we had usury laws in the country that at least tried to keep nonsense like 30% interest rates from happening, and make lenders and borrowers more cognizant of their responsibilities. The financial industry lobbied hard and successfully to eliminate those laws.
So yes, while the credit card companies do have a lot of justification in their business model, many of them - such as Capital One - have grown by targeting the subprime market, and have only given token nods to things like ethics and long term business models. Indeed, there is a lot of evidence that their business models targeted lenders who would incur fees and penalties over borrowers who would be unlikely to incur such charges.
And yes, there are cases where even a responsible borrower can find him or her self in financial calamity. Medical incidents for instance, where the person has used credit cards to fund medical costs. Not smart perhaps, but ethical.
-P
Interesting perspective, but like others, I feel that it left out much of the abuse that the credit card industry has done to its customer base.
Other unmentioned abuses:
Universal default. Whereas you are late on another credit card, so your current credit card that you have so diligently paid on time decides to take your rate from 9.9% to 29.9%, even though you have paid on time with them.
Credit Score. This one is not so much on the credit card companies themselves, but the insurance industry. If you have less than a stellar credit score, the insurance companies will charge you more for your car/home insurance.
So what you have here is a case where Jake is down on his luck, or was Jonesing and bought a Navigator, has been late a number of times, +30, +60, etc with the CC companies hitting him with over the limit fee's, late fee's and jacking his interest from 9 to 29%, but now the insurance companies want a piece of the Jake cake as well, so they raise his insurance rates too. Let’s just hit the man so hard, he'll NEVER recover.
I can verify that my insurance, no accidents or tickets in 20 years went to $950 per six months with a credit score of 600 (it wasn't due to the neighborhood) and then down to $581 when my score was back to 740.
Word to the wise, stick with Credit Union's, convert credit card debit to signature (installment) loan. Installment loans don't have that Balance to limit impact and as long as you pay on time, your good to go.
As far as I'm concerned, Congress, airheads that they are, has not gone far enough, pay back is a @#$%^.
PS. Jake should never have qualified for a credit card in the first place. Credit is not a right, it is a privilege.
Looks like everyone eloquently stated what I wished to say....except for one thing.....
Let's say Howard, the good credit risk, has a $1000 balance, and is asked to pay, say, $18 a month (which includes the interest, meaning it will be years before the whole thing gets paid off). Instead, Howard ties to lower his debt responsibly, and so he sends in a payment of $500. However, it's a day late.
Why is he penalized $50 for a late fee? I hope that issue is addressed in the bill. (Anyone know if and when the bill will be available for public review?)
this article seems to be full of half truths which is more dangerous than white lies. I think the comments point the real picture
i have never missed a credit card payment. my allowable credit is being reduced on several cards. i have been notified that if i use them my interst rate will be increased.so even if you do every thing right they still screw with your credit. most of them are boa owned cards.so whether you do. good or bad they do whatever they want to.i always pay more than min payment. so whatever calculations they use is beyond me. they change the rules as they want to.
Your view of the world, the basic principals that you understand as truths, are so warped to me that I can't even imagine what cereal box you got your education from, Mr. Indiviglio! It's like reading the bathroom scrawl of a lunatic - nothing makes sense.
It's interesting how these financial institutions did not apply the same risk analysis to their own reckless (leverage of 30 or 40 to 1) "investments."
All financial institutions thrive on the borderline poor. They let them borrow just enough to hang themselves in the near future. Then, they squeeze all they can out of them. Customers that pay on time shouldn't be rewarded with a share of that blood money they collect via their lower interest rates. If someone is a risk, they shouldn't get the loan to begin with. Let the institutions make their profit on those people who can afford to make those regular payments without the discounted rates.
This is no different than all the easy qualifying of mortgage loans made in the past. Big business prey's on the poor. Let's mention that the insurance industry, also, has managed to get rulings in their favor so they can prey on the disadvantaged and poor. They can justify higher rates for their poor customers, that are REQUIRED to have auto insurance, because of their bad credit ratings. And this has nothing to do with their driving history.
Every person of management in the financial industry should get the chance to be disadvantaged and poor WITHOUT choice, just like many Americans have, already. It's easy for big business to prey on these people because they know, as a group, these people can't organize to defend themselves.
I have no sympathy for the financial industry. If people would learn to live their lives within their means and could avoided that persistant influential steering by that industry, there would be less stress in this country. Let's take the greed out of financial institutions. Stop borrowing for the things we want and, only, borrow for what we NEED. Otherwise, we are just as greedy as the industry.
How does raising Jake's rate, or the elder mom above, help them to pay you back??? This happened to my family and is partly the reason why we are heading into bankruptcy. While I was in the hospital for an emergency problem, my husband used our credit card at the supermarket. The company allowed him to go over limit by, like, 5 or 10 dollars. Next month...guess what? A large fee PLUS they jacked my rate up to 32%!!! Now, how was that supposed to help us? The credit card company can go screw themselves. We have paid back what we owed for what we bought several times over, now it's just interest. We could NEVER get ahead. Oh, and then my husband got laid off last September. yeah.
My story is that I missed a payment in 2006 because I was in the hospital. I missed one payment and my card was sent to collections. My interest rate jumped from 8% to over 30% and the next month, the balance due jumped from about $50.00 a month to over $1,000.00 a month. I called my bank to try to pay down the debt and they agreed that if I paid them $200.00 a month for a year that the payments would drop and my credit score would only reflect the payment missed while I was in the hospital. They didn't even care that I couldn't make a payment from the hospital when the payment was due, they want their money when they want their money and they will make your life a living hell if they don't get it - truly they employ mob tactics.
Three years later and I am still paying $200.00 a month as I have been for the past three years. After the year of $200.00 payments was over, the bank refused to acknowledge our agreement and they still show that I paid under the balance due for 9 months, instead of missing one payment. My credit score is 590 - very low. This is the only credit card I've ever had and I although I have not used it in 3 years, even though I've paid over the balance for 3 years, my interest rate is still over 20%, the fees are astronomical, and my credit score is so bad I might as well just stop paying the damn thing. Lord knows being a good money maker for them does not have any benefits.
As far as I'm concerned, the president of Capital One, Bank of America, Wachovia, Visa, Master Card, AmEx -- ALL OF THEM SHOULD BE JAILED. They are the modern MOB.
The credit card industry did this to themselves. They could have done their own policing and probably would have gotten away with much lighter regulation. People who are credit risks should pay more for credit - it is just how the system works.
I used to carry a small balance on a Capital One card and never made a late payment. Capital One raised my rate considerably over the past two years so I paid the bill in full and will never use this card again. Is this a good business model? I suppose to someone at Capital One it makes sense.
Now that the new regs seem to be a done deal, how long before Congress mandates, similar to the CRA and mortgages, to whom credit card companies should provide credit? Those who are credit risks should have a more difficult time finding "affordable" credit card rates and will not doubt find a shoulder to cry on in Congress.
I would lilke to see this writer's bank statements in the last year to see if he is being paid by one or more credit card companies to write such articles. It is not just the article is wrong and that it leaves out 99% of the relevant facts or that it makes zero attempt to see the matter from the consumer's side. It is worse than that. The article is a deliberate and cynical attempt to misguide and deceive readers. The slightest bit of research would have shown that he not only has his facts completely wrong but that there are far more instances of credit card fraud being praticed by the credit card companies than by the people who are forced to hold credit cards. For example, I was forced to get a credit card and make payments so that I would have a credit history so that I could purchase a car. And if I canceled my card after getting credit for the car, then I would not get credit the next time I wanted to buy a car -- or any other big-ticket item. So, the whole system is geared to screw the consumer, no matter what.
How stupid Anpadh. Who held the gun to your head to "force" you to get a credit card? And smart people like my parents and myself pay CASH for our cars. You screwed yourself by wanting a car you couldn't afford. Also, you could keep the card and just not use it! Don't blame others for your lack of personal responsibility and greed for material things.
I don't understand this idiot assumption that poor people should pay more for credit cards because they are poor. DON'T GIVE POOR PEOPLE CREDIT CARDS, STUPID! Everyone should be charged the same interest and fees no matter how "risky" they are. To divide people based on income is only inciting economic tension in America. If you aren't feeling the economic tension then you are making too much money.
One other thing: CypherGhost at HOPE (Hackers On Planet Earth) figured out that when the USPS scans the digital barcode at the bottom of your payment's prepaid envelop (the code is a combination of long and short vertical bars), it sends credit card companies a message that your payment is on the way. So cut the code, paste it on a letter to your grandma. And let them believe you sent your payment. Information is power. Use it.
Fatal flaw in this explanation - and I can't help but think it's intentional:
"You now tell him if he wants to borrow more money, he needs to pay 25 percent interest.
Jake feels persecuted, so he complains to mom. Mom says you are mean and can't take advantage of Jake that way. She says you can't increase his interest rate. "
Not exactly. The credit card companies now can't raise interest rates on EXISTING balances - does not apply to new lending.
Get it right.
And when is someone going to check into the Consumer Credit Reporting companies like Experian that work hand in glove with these disreputable credit card companies?
Maybe one of you economists can explain this:
Jake is unreliable, so why not charge him 5% or 9% - instead of 25%?
If the payments are easier for him it would be less likely for him to default.
You also missed an obvious reason, credit card companies charge high interest so they can recoup their money AND can claim losses.
Let's say Jake borrows $100 at 25% interest. He pays 5 payments of $21, but still owes money because of compound interest. The CC company now has its original $100 back, plus a little - but Jake still owes money.
If Jake defaults now the CC company claims a loss and benefits (taxwise), while not having actually lost any $$$.
This article reads like it was written by credit card company cronies.
In THEORY, yes, this is how and why a credit card company does what it does. Except that they EXPLOIT their position at every possible turn, just like a loan shark does.
Some examples:
1. I have a credit rating over 800, have never missed a payment on any bill in my life, including credit cards, and never carry balance on any credit card, EVER. And still, my interest rate on many many credit cards would be over 20%. Fair? Representative of my credit risk? No way. It's loan-sharking.
2. I used to have a Visa from a certain bank. Frankly, I can't even remember which one it was. I dumped them long ago. Here's what happened: Every month, on the 30th or 31st (last day of the month), I paid my bill in full. The payment was due on the 6th of the following month. Over the course of 2-1/2 years, there were 3 times that for some unexplained reason, they said my payment didn't get there before the 6th and they charged me a finance charge. Each time this happened, I didn't question it, UNTIL the 3rd time. Then I went back through EVERY SINGLE ONE of my credit card statements, and I noticed that my balance was over $1000 only 3 times in the entire 2-1/2 years. And those 3 times, "just coincidentally" were the 3 times they claimed they didn't get my payment in time and hit me with a finance charge. Coincidence? Slow mail? That just happened to occur on the 3 out of 30 times that the balance was over $1000? Yeah, right.
It was abusive and arbitrary.
3. How about their well-known practice of raising people's credit limits without asking them. Doing them a favor? Or just trying to give them more rope to hang themselves. Banks, at least the way the banking system USED to be, did not lend money this way. They only lent you what they safely thought you could pay back. They didn't watch you make minimum payments for 2 years, carrying a balance of $10,000, and then say, "It's obvious you can't pay back that $10,000, so let's make your limit $15,000!!!"
4. When you borrow money from a bank and miss a payment because you lose your job, or have a bad month, does the bank CHANGE THE RATE ON THE LOAN? NO WAY. They can't. You signed a contract. Where do the credit card companies come off "piling on" by raising the rate when you miss a payment? How come they can't just charge you interest for the extra time like a normal loan?
Gee, if I paid my bill on time for 3 straight years, and my interest rate was 18%, how come I can't make them LOWER my rate, yet if I miss a single payment, they will RAISE it?
The credit card system is NOT predicated on lending people money that they can pay back. It is designed to keep people stuck paying forever - it is designed deliberately to ferret out people who CANNOT afford the debt and can NEVER pay it back. It is designed to let the banks pile on punishment and fees that far exceed any reasonable amount. It's just like the phoney baloney real-estate lending practices that have buried our economy now.
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How to "beat" the credit card companies? Discipline. Buy EVERYTHING on credit cards, but keep all the cash aside, and pay it all off every month. Float THEIR money for 20 days. They HATE this. That's why they call people like me "deadbeats" - people who pay their bills on time every single month. The credit card companies can kiss my....
They are no better than a guy who delivers a paper bag of money to you and then breaks your kneecaps the following week if you are one day late.
Look here, borrowing money is not a right. These companies are making a business of lending. If they offer horrible interest don't use them. And you can make a company lower your rates. Just call them and say, hey, I've paid on time for the last eight years, I'd like a lower rate. I've done it. I've asked and received increases in my credit limit and I've changed companies to receive more favorable rates. At the end of the day, you remain free to borrow or not from any credit company at all. Why don't the companies deserve reciprocal treatment?
Few people with financial discipline have complaints about credit card companies. It is those who think it is their right to spend on whatever they feel like without consequences that are making the noise.
Yeah! And what about those greedy oil companies!
See the thing that is odd is that irresponsible borrowers ask for credit, can't pay it back and the LENDERS are the bad guys. Why does no blame attach to the idiot who runs up a bill that is beyond his means? Whatever tricky means credit card companies are trying to recover their losses, the final blame rests squarely on the shoulders of the borrower who has no clue about what they are signing onto with their credit card and agrees to any terms for the prospect of easy credit, has no clue about their own financial situation and ultimately no intention of making sure they make good on the debts they run up. No legislation is needed if people would just refuse to undertake debt they can't pay.
Mr. Shmoe, even if you are so smart that you know better than ANYONE else in EVERY aspect in life, please recognize that some people are weaker than you and need help from regulations...
Join the original author in the cone of shame for not thinking the argument entirely through. I have a substantial amount of credit card debt that I can afford to pay. I have a sterling credit report and make more than the minimum payment on time, every time. However, as things currently stand, the credit card companies can jack the interest rates up as much as they want, and create an untenable situation. That is not me not understanding what I can afford, that's them changing the rules of the game and making it unaffordable to me after the fact. It's not that there is not truth in what you're saying, it certainly applies to many people who have legitimately over-extended themselves. The problem is, with no leash on this industry, they can push people over the edge simply on their whim. I signed up for this in good faith. The least they can do is operate in good faith and price based on future risk, not re-price stuff that I've been meeting my obligations on. What's good for the goose is good for the gander.
In my life, I have seldom carried any balance on a credit card. I pay in full monthly. With the exception of my house and car, the idea that I would use credit to live my daily life just seems irresponsibly risky to me. Raising fees retroactively is not particularly friendly, but then again, such a maneuver was clearly outlined in every credit agreement I have ever made with such a company. What you are conveniently forgetting is that credit is a privilege. Companies are running a business offering it to you. The simple way to avoid punitive terms is to not use credit or to pay off every month. If you are getting into a situation where you can't do that, it isn't the card companies fault that you keep BORROWING in full knowledge of your own inability to pay.
Joe Shmoe may have the best understanding of this topic. Credit, and especially credit cards, is not a right. It is a financial tool for the responsible. Many card holders are irresponsible. Like the other sub-prime borrowers, they are the ones CAUSING the problems they find themselves in by overspending.
There is one right that even uneducated and irresponsible people have: the right to be informed of what they are sold. You can consider the customer is the problem and decide not to protect them, but then expect hell. As someone said above, an unregulated market opens the door for people who are profit-driven, with profit-driven objectives, and it will mean screwing people in every domain. And you will probably be one of these people sometimes... Enjoy salmonella in your food, variable interest rates on your mortgage, credit cards, crappy high-milage cars and other complex, sub-par products, thought through by people with one objective in mind: use you for profit. The objective of any suustainable economy has to be value creation, and free markets don't always guarantee that. When it is not the case, government needs to step in, and help the consumers realize that. In this case, CC companies clearly aren't trying to create value for all their consumers - they are for some but they are screwing the others for profit.
You fail to mention how the credit card companies target college students and other people with no income. How there is little to no income verification other than someone writing 50000/year into a box.
Credit card companies bank on people not being able to pay back full amounts. Even more so on high fees and penalties. Yes people need to be smart and not buy what they cannot afford, but preying on people's weaknesses, offering large amounts of unsecure debt and then forcing them into absolute inability to repay that debt via interest rates that are "loan sharking", fees that are ridiculous and contract language a harvard law student could not comprehend is not exactly being fair either.
If credit cards are simple economics, why is the fine print more than two pages long? Nothing simple about that.
This guy seriously needs to write a follow up to apologize for this pandering mess that he's released unto the world.
"To divide people based on income is only inciting economic tension in America"
Income contributes to capital. Capital is the base of capitalism. The idea of communism is great, but it doesn't work. What do you propose?
I propose paying people a living wage if they're working 40 hours a week regardless of how little respect their job garners in America. If that doesn't happen, if the middle class keeps trickling down to the lower class, then I expect an economic revolution.
Also, limited Communism seems to be working fine in Europe, although we don't call it Communism. Totalitarian Communism historically hasn't worked very well but I believe Democratic Communism could work.
Communism has failed, not only as a political regime but also as an economic model, because it does not respect private property, which is a base requirement to any viable economic system. European societies are capitalist in the sense that they respect private property but think, like you do, that economic inequality is not sustainable. They have therefore created mechanisms to redistribute wealth and guarantee a better equality between individuals. They also believe these mechanisms can only be created by democratic means: that's why they are called social democracies (and not "limited communism"). The logic of the system works because democracy guarantees equal power to all individuals, in theory. It seems to work in practice too, since European societies are obviously more homogeneous than the US society, for instance, which helps in tough times like now. The system is also less efficient for the society as a whole, but how much can you drive efficiency without putting sustainability at risk? It's There is definitely a limit, and the US is learning the tough lesson right now...
Communism hasn't failed though. How's China doing compared to the US, cowboy?
China's doing great, Kong, as long as you're not a Chinese citizen. Their wages, living conditions, and working conditions are very poor. The government's doing great -- government usually does well under communism, at least for a while, but the people live in an oppressed society. That's why your theory of Democratic Communism doesn't work -- you need a strong government to enforce communism, because no rational person would knowingly choose oppression. Capable people like to be independent enough to live their lives as they see fit.
Well I am glad you ask: during Mao Zedong and until the end of the 1970's it was doing very poorly. It has done fantastically since then, although it is all very relative (GDP per capita is ~$6,000). The agent of this fantastic change is a guy named Deng Xiaoping. How did he do it, you ask? Well he basically steered the country away from communism by reinstoring free markets in different areas of the economy (agriculture, businesses, etc.). So China has been transitioning from Communism to Capitalism, hoping it will land somewhere in the middle.
Incidentally, I am sorry to let you know, Kong: farmers and non-qualified workers in China are not doing well, they are underpaid, underprotected, and probably can't get credit cards while the richest, educated and living in western-like urban centers like Beijing and Shanghai take full benefit from the country's economic growth. Inequal you say? Well that is life. Even a "communist" country like China can't fix that.
China also doesn't have democratically elected leaders. This is what I know - the rich cannot just keep hoarding money and expecting everyone else to just make do with less and less. You can't inflate the working poor, tell them to eat some cake and shut up, and expect to keep your head. My proposal (the one you jackholes ignored) was to pay people more. Communism seems like the next probable solution if the few with refuse to give more money to the many without. Do you honestly think millions of Americans are going to keep slaving away so that their bosses may live comfortably while they and their families starve? Hell no. This is America, damnit, and we're not a people to back down from a good Revolution when it's in order.
PERSONAL RESPONSIBILITY PEOPLE !! The individual is responsible for managing their income and balancing their wants and needs. If you can't make the payments--don't apply. If you can't keep up with what your minimum payments are and what you charge and what your credit limit is--don't opt for a credit card. It's not rocket science, it's quite easy. In addition, corporate America has been "robbing Peter to pay Paul" for decades--it's called Insurance.
Gypsy,
I know this is hard for you to understand but most of what happens to you in life is out of your control. Many people who depend on investments for income now find that their income base is drastically reduced. This is just one example. How about the investors with Bernie Madoff? Do you think fraud is expected? From the moment you wake to bedtime and beyond you are dependent on others to be able to do anything. So f**k your mantra of personal responsibility as it is rhetorical nonsense. When illness strikes United States Citizens and they suddenly find themselves deeply in debt what do they do? Around 50% of bankruptcies are health related. I can't wait for your first personal realization of how helpless you are in the face of this reality.
I agree with Gypsy.
While what Mark is saying is true. We all have experiences where unfortunately we do have to rely on credit cards to get by. That is not the credit card companies fault. I am grateful that I did have them to help me through. It was however my fault. I could have saved more or not used the cards for "wants". Bottom line is that the credit card tells you exactly what will happen if you abuse the use of the card. If you failed to read or understand that is your own fault. NO ONE ELSE'S. Quit crying and take accountability for your own actions or non action which ever you like. Stop blaming others for your short comings.
Excellent post. Credit cards are a privilege and convenience, not a right.
I pay my cards on a regular basis without incurring any penalties. While my rates range from 8% - 18% I get numerous "balance transfer" offers every year offering short term rates as low as 3% and "until payoff" rates as low as 6%. In fact I'm still paying off two cards: a FNB Omaha offer of 2.9% "until payoff" (that one didn't even have the usual 3% fee) and a Bank of America offer of 0% until 10/09 (this one had a 3% fee).
This bill was pure pandering, less responsibility for people, more for the government and corporations ... that's not really a step in the right direction.
The only issue addressed that had any value was "double cycle" billing - that's just nasty, but then if you don't like it, pay off your balance and use another card.
Either Mr Indiviglio has no credit cards, or someone else pays the bill. Is he kidding? As has been noted several times in the comments, there is no way to pay your bill and get a break. No Way. If you pay on time, you are considered a drag on business because the credit card company gets no fees and no interest from you. If you pay more than the monthly minimum, they don't care. If you pay the minimum, they don't care. Credit card companies are abitrary and all those "complex models that include dozens of variables", not unlike the same horse hockey in derivatives, are there to baffle them with BS when you can't confuse them with big words. There was a time in this country that it would have been unconsciounable to charge 20 or 25 percent interest on ANYTHING. It was called USURY. There was an attempt to make credit card companies (most all owned by banks) comply with the same interest rate laws as banks. Thanks to lobbying efforts by those very same banks, the law was not passed in a helpful way for consumers. All the credit card companies moved their home offices to Delaware and I believe North Dakota (I might be wrong on this second state) - the places where by state law companies can charge whatever interest rate they choose. And thereby hangs the tale. It's all very well to sound so high minded, and Gee, the credit card companies are just trying to stay in business. But it's all false, and as one other commenter indicated, half truths that may be more damaging than an outright lie. I have reduced my cards to one with a $300 limit. Most often I have a credit balance on this card because of how diligently I pay it off. This has NOT resulted in one point of interest being reduced. I cut up the other cards, and I am paying them off. Period. The real jam is that we have been dragged into a financial situation that relies on access to credit, and having us by the short hairs, the credit card companies are dragging us even farther into that good night.
It sounds to me like about 95 percent of credit card problems can be solved by two simple rules:
1) When you open a credit card account, set up autopay for the minimum balance.
Make additional payments as needed, but set up that autopay for the minimum the day you open the account. Set up autopayment, get a letter from the card company that you set it up, and you never "accidentally" miss a payment.
Btw, I don't buy the claim that the credit card companies hate people who pay their cards every month. I think the credit card company is happy to lend me whatever money I want in exchange for a transaction fee and the spread between my 9 percent rate and LIBOR. Why did they offer all these nice point programs if they actually hate having me as a customer?
To get you to borrow more and pay extra fees and interest?
That's exactly my point, Drichi. The credit card company is really happy to charge me a pretty low interest rate on that unsecured debt I borrow. (I autopay, so have never had a fee. They know I have autopay. They're happy to just get the interest.)
Some people said credit card companies don't want people with good credit who never miss payments as customers. But you're right Drichi, they do want me as a customer.
Can someone tell me how charging unreliable folks higher interest increases the likelihood of getting your money back?
Seems to me that it increases the likelihood of the unreliable folks not being able to pay your money back.
Which is easier to pay back? $100 with 5% interest or $100 with 20% interest?
Seems to me the former would be less risky when loaning to anyone.
Seems to me the guy who wrote this opinion piece lives on Bizarro World where credit card companies are just trying to make a living, as opposed to what they do, here on Earth, which is make as much money as they can no matter what.
Hey, they've gotta eat (caviar) don't they?
Just my two cents plus a twenty percent interest rate which I'll hike up to thirty percent if you're an hour late with your payment.
As stymie pointed out... You conveniently overlook the part where you start charging Jake more on the money he has already borrowed... not just the new money he wants to borrow.
Mr Indiviglio, for lack of better terms, you are a MORON! You have absolutely zero knowledge of the credit card industry. Do your homework before you write such asinine stories!
I am sorry but are you an infant? How can you leave out major part of the equation? Jacking up rates to good customers with no reason and basically using predatory landing on a constant basis.
That same big bad Mom you mention is bailing out the stupid banks for their mistakes, but nooo if anyone is trying to help working class then you get those same banks telling us to pull our selfs by the boot straps.
hypocrisy in the business community is amazing in our society.
Next time think before you write and publish.
Your economics lesson is very accurate, but at the same time these companies act in completely arbitrary ways. Personal example...
Customer of this one card since 1992, 17 years. Pay on time, never late. Came back from a vacation and oops missed by a day. The next statement, my minimum payment increased by over 100 dollars and my rate went up to 24.something percent. I called and they did retract it. They also told me "don't let it happen again" or else there will be no retraction. Just because I missed one payment by one day I should be treated in the same fashion as your "Jake"? I don't think so.
Yes they are a business and yes they are allowed to make a profit, and yes they are going to do whatever they can to find all the loopholes in this useless legislation so they continue to make money, but they need some kind of leash. This legislation is not the answer. Maybe they need a better computer algorithm for dealing with minor deviations, but something is just not right with this industry. All this new legislation is going to do is make it more expensive for the responsible and cut breaks for the irresponsible. I just need to pay them off and stop using them. But then that will probably negatively affect my credit score. Every time you learn the rules,they change the game.
Daniel,
Sounds to me like you're a complete idiot who needs a class or two in growing a brain.
I was about to say just about everything that's been said in all the above posts. Universal default is a joke. Interest rates are raised in a heart beat for reasons such as "rumor has it Jake is unreliable". And those excellent, complex and PhD-designed formulas calculating risk... well they calculate risk in such was as to maximize profits, which means they are biased and skewed.
I've love to see a reply from you... but of course you couldn't be bothered.
The bottom line is greed!! A total lack of conscience on the cc's part. It is ok to make a profit that is reasonable. Most of the cc's do not understand what is reasonable. When does it move from profit making to fraud or just out right theft?
How did this idotic article end up on Yahoo? Who is this Daniel Indiviglio? Is he one of those kids who never attended school along with Jake? Please stop preaching and pick up a book and read.
Of course, 'Credit Card' companies wouldn't operate without the greed of the average consumer who 'wants it all and wants it now'. Without the debt created by credit this world would be a far better place.
Users of 'credit cards' pay an average of 19% MORE for their purchases than someone who SAVES UP for his luxuries.
Use a credit card? You're an idiot.
I don't know if you've tried to buy a car or a house lately, but you cannot do either in the current system, unless you have a credit history. Wages have been stagnent for the last 10 years. Twenty years before that, wages were not rising to meet inflation. People cannot save because people work 40 hours a week and all their money goes to rent, food, medical bills, and electricity. People aren't out drinking and buying videogames, they just honestly cannot save given modern wages. If you do not believe me, talk to some of your neighbors, observe their habits.
Rubbish. I saved up and bought my car cash. It cost me 13,000 and - boy, did I feel GREAT after doing all that hard work to EARN it, and knowing I owed NOBODY a penny for what is MINE.
As for the house - sure, I got a mortgage for that - based on the fact that the house ITSELF is worthy of the credit. Wow, I'd have to have an AMAZING 'credit history' to be deemed worthy of 300,000.
It's the greedy assholes who use easy credit who make seedy credit look respectable.
Do yourself a favour - next time someone asks you for YOUR credit history, tell 'em to shove their product, then save up and buy it from somebody else.
Dean-glad to see another of the few who understand you should buy what you can afford (pay for NOW). With the exception of mortgages most other credit is really not necessary.
(a Credit card is, however, needed for on-line purchases and renting cars etc.)
"With the exception of mortgages most other credit is really not necessary."
So then tell me why credit is so much more developed and used in the US, where it is mostly deregulated, than in Europe, for instance, where it has not been encouraged (except for cars and houses) and pretty tightly regulated (e.g. there is a specific personal income/debt ratio banks CANNOT overlook when they lend you money).
nascar, credit is much more developed and used in the US than in Europe simply because you've BELIEVED the credit-companies and actively supported a debt-based culture.
Credit is only credit until you borrow; then it becomes debt.
Had the average American sat down and considered the proposition for himself he'd have soon realised the sums could never add up in his favour, and America is paying for that lack of consideration right now.
Case in point? Borrow money for a car, see the car half itself in value one year after purchase, continue paying the original loan for five years.
Who profits? Not YOU!
Proverbs 22:7 states
"The rich rules over the poor, And the borrower becomes the lender's slave"
If you choose a credit card, you choose to be that lenders slave.
Choose wisely!
The issue from my perspective, Mr. Indiviglio, is the question of duration of "disciplinary action".
People will have negative reports on their credit for 5 to as extreme as 10 years. So, in your analogy, Jake might have cleaned up his act, have a good paying job, all debts paid off. Yet, you still wont lend him money for something that happened 5 years ago.
The true issue is only partially a matter of interest rates, but I think something needs to be done to reduce the amount of length negative reports keep credit scores low. In the end, this further hurts the housing markets.
For example, Jake has a credit rating of 520. No one under the sun is going to lend him money for a house. He may have to wait 5 years before his credit is good enough to get a loan. So, in a housing slump, he cannot get involved and make a purchase. Now, multiply Jake's situation by several hundred thousand people, and you see a perfect Catch 22. People who are ready to buy, but have had their credit tarnished in the past now cannot get a loan to buy a house, which would alleviate the housing market slump, or save someone from a forclosure.
In the end, its these very credit companies that are creating the economic crisis. Should they go unpunished, especially with banks happily usurping the dollars of taxpayer money for corporate jets and bonuses?
The only way to fix the ongoing issue is to severely reduce the length of time that negative reports remain on a person's credit report. There should be a 2 year maximum length instated from the point that a negative report is resolved. This will allow Jake to learn from his mistakes made while working and going to college at the same time, and move on with his life once he obtains a position in his profession.
Banks (and their cash cow credit card businesses) are run by people. People out to raise earnings by any means including exploiting people down on their luck and young adults just entering the game. No one expects corporations to operate at a loss, but too many have become greedy.
When my children registered for classes as freshmen entering college, bank recruiters swooped in and signed them up for a half dozen credit cards. No one asked my permission as the person financially responsible for their tuition and expenses. And that includes the colleges that allowed the practice on campus. I didn't find out about the cards until their debt was as big as their tuition. The banks readily admitted they expected parents to pay off the debt. What a way for young people to learn about life. That was 1989. Twenty years later, greed has become this nation's biggest pandemic.
Daniel Indiviglio, you may defend banking institutions, but some of the people running them (as well as Wall Street, corporate America and government) need lessons in humanity and 'doing the right thing.'
Aside from your failure to note the deceptive practices the CC companies engage in on a regular basis to gin up additional fees and penalties, your use of and reference to some magical black of risk analysis, where "a rigorous, highly tested credit recommendation pops out of their risk management engine," is sophomoric. First off, the "analysis" is based in large part on a FICO score and the notoriously flawed information supplied by the three major credit reporting agencies. And to think that everything must be right since after all "they literally have math and statistics PhDs who are in charge of this stuff" is (unless you were aiming for a Colbert Report style of sarcasm) ridiculous. Your editors should shoulder some of the blame for letting this ever get to print. As far as risk models are concerned, one major factor that you should consider before you revise this piece (and issue an apology to your readers) is that the higher the monthly payment you charge Jake, the higher the likelihood is that he will eventually be unable to make his monthly payment. Such a situation all but guarantees he will fall into a cycle of late fees and continual payment where the amount of money received by the CC company over time greatly exceeds the original principal or what they would have received from him if he had been in his brothers situation. Lastly, this model doesn't mean that you can't or shouldn't allow for higher rates based on risk, it simply means that you should not have UNREASONABLY HIGH rate differences. Do your homework, take your spanking on this one, and resubmit.
Good. Let's start regulating the credit market so that credit card companies ARE more responsible and stop making risky lending decision. It will be better for riskier borrowers (who easily get into trouble when given too much credit) and better for the economy as a whole. It will protect people with good credit and bad from radical shifts in interest rates.
Let's face it, as much as Mr. Indiviglio would have us believe that changes in interest rates are made strictly by using some mathematical formula. We can see from the radical interest rate hikes experiences virtually universally by American credit card holders recently that banks will hike rates for reasons outside the statistical model (like maybe they desperately need cash to cover the losses from other bad investments). If rates only changed via some scientific model, rates would change relatively slowly, not jump 10% (or more) in a month. Additionally, rates would change differently for different classes of borrowers, not virtually universally as we have seen recently.
One thing is for sure, you can bet that these companies aren’t loosing money from credit card lending. Additionally, I am pretty sure that these companies are more aggressively (and riskily) marketing credit cards and receiving higher profits than in decades past. In order to receive this increased profit they need to use riskier lending practices and use more aggressive collection methods. This increased risk results in overleveraged borrowers who are more likely to default (and have their lives ruined in the process). This is irresponsible because while the credit card companies eek increased profits it is done by exploiting the most vulnerable of Americans.
Daniel,
I need to ask what gives you the right to make such an ignorant statement regarding the credit industry. What qualifications do you possess to determine the example you cited was correct?
Having extensive expertise in the credit lending world, your example is flawed under the "economics" model. Credit lending is a scarce good, and those who warrant it pay for it with interest. What has happened in the last 10 years is this "scarce good" has turned into a saturated market, in which any "joe shmoe" can receive credit as long as the scoring of the credit report is acceptable.
What the CC market has done is to take economics and skew it for the sake of profit-generating racketeering. That's right. Racketeering. There is no justification to turn Howard into Jake.
And this is precisely what is happening.
CC cos. have been changing the rules so many times, it's impossible for Howard to remain the good customer. All it takes is ONE mistake (whether it be his fault or external environment issues) and Howard gets dinged.
In more ways than one, all of which are detrimental to your "economics" model. Not only does Howard have to pay a penalty to the issuer, but any other issuer now has the "right" to increase rates for this one ding. Finally, the ding is recorded on the credit report for a minimum of two years, branding Howard a "slacker".
The government's involvement doesn't do enough. There needs to be stipulation the NINJA loan application is outlawed, and that all applicant information must be proven before being accepted.
This "open hole" will allow CC cos. to continue granting dead people credit, and when they don't pay, the "Howards" end up paying for it.
Having expertise in this world was beneficial. It allowed me to file Ch. 7 bankruptcy nearly 10 years ago, and I've never touched a CC since. It's a good thing I took this approach, because it wasn't a surprise to see how the CC industry lobbied congress to change the bankruptcy laws only to turn and increase every consumer's base rate to 4% for the sake of "helping consumers pay off their debt faster".
This industry should be made illegal given its racketeering business model. Loan sharks don't even charge what the CC cos. do.
I feel sorry for anyone owning a CC, because if you think this law is going to help you, think again. These companies have already started working (from those PhDs, mind you) on ways to circumvent the law to charge you for holding their credit. Best get out from under them before 2010 while you can.
Oh, and one more thing, Daniel: It appears you haven't read the entire bill. If you had, there's no way in hell you would ever defend this industry. So do us consumers a favor and educate yourself before you waste our time with crap like this.
Thanks,
-R
"Capitalism is the extraordinary belief that the nastiest of men for the nastiest of motives will somehow work for the benefit of all."
- John Maynard Keynes
Keynes was wise - thanks for sharing these words, George
Well said. Thanks.
People are being silly. Who cares whether the credit card companies hate those of us who pay off their credit cards fully each month. I haven't paid a fee or a iota of interest in over ten years. I charge absolutely everything I can to credit cards and get great rewards... 2% on all purchases to a 529 plan, 1% cash back on other cards. I max out each card on rewards and then go to the next. This rewards with me with several thousand in rewards each year (yes, I charge a lot). So, the credit card companies consider me a deadbeat. What do I care. I hear some of them plan to reduce rewards. I will use the ones with highest rewards and lowest costs and then switch to cash if there are no rewards.
People who charge what they can't afford to pay are causing their own problems and allowing themselves to be abused.
Must be nice to be independently wealthy and to play the game that way. Most people weren't born with a silver spoon in their mouth.
Credit card companies don't hate all those who pay their bill in full.
Don't any of you know how the credit card system works? Visa, MasterCard, American Express & Discover charge the MERCHANTS every time you use a card. The rate varies from 1.5-3.5%. Therefore, if a GOOD spender uses their card and pays it in full every month the card issuer still gets the "discount rate". So, a high-spender putting $100K annually on a card can generate up to $3500.00 in "discount rates" even without interest and fees.
That is NOT something for nothing, and why should that GOOD cardholder pay more so that folks who are financially ignorant don't pay their fair share? For some of these people who spend more than they can afford 28% interest is cheap! A pawn shop in Hawaii can legally charge as much as 240% (20% per month!)
I thoroughly understand the logic, but this is not what credit companies are doing right now. I am finding more and more that they are charging their good customers higher rates in order to recover higher loses than expected losses from their less reliable customers. Case in point is someone with an impeccable credit record, FICO exceeding 760, income 6 figures, debt to credit limit ration of around 10%, stable employment as a highly paid professional. This person got a letter from Capital One essentially stating that after almost 10 years as a customer his current interest rate of 4.75% was being raised to 12.5% for no apparent reason. When this individual called to get a reason, they couldn't provide one other than in the current economy they need to lower their exposure. As this individual didn't need this credit line, he promptly refused the increase and closed the card. I know they say never close a card but believe me it will have a very small impact on his overall FICO.
I am seeing more and more credit card issuers just trying to get more revenue from anyone who can pay when their default rate increases to mitigate their overall losses. Problem is just like the mortgage industry, they shouldn't have lent money to high risk individuals period. Charging a higher ineterst rate may work in a good economy, but as soon as the economy goes south these will be the first borrowers to default. Escalating their interest further only increases the likelihood they'll default.
Everyone is now in the sights of the credit card companies and they appear to be salivating over the possibility that one of their good cusomers might send a payment in late some day so they can assess fees and escalate the interest rate.
Bottom line about the individual above is he got a VISA from Chase, no fee with an interest rate under 5% and it's not a teaser.
Not only are these card companies charging outrageous fees and usurious rates (a moral if not legal definition), but they’re also hitting small mom and pop merchants with fees of as much as 5 – 6% on every transaction (larger stores pay 1 - 3%).
That said, if you’ve been hit with fees and have the time to pull all the statements together and total everything up (and recalculate interest at say 5%) to see what excessive charges are, you may have luck calling up company and getting them to issue a credit. I went back 4 years on my wife’s account and figured at least $400 in excess charges and got > $300 credited (but not by customer service, had to call president of the bank and then deal with an exec assistant who was very helpful). Good luck.
Any Mom & Pop paying 5-6% is either a VERY high risk business or naive. Top credit card processors charge more like 2-3%.
More important, it is essential to differentiate credit card issuers with credit card processors (serving merchants). A few banks and companies do both, but most of the time it's 2 very separate companies.
Credit card issuers are the ones who charge you interest, late fees, etc.
Credit card processors serve merchants with technology that allows them to accept cards from anywhere in the world easily. Merchants fees differ on credit and debit cards, and average 2-3%. Any Mom & Pop paying more than that needs to find a new credit card processor!
A common theme among the comments is that CC companies are generally bad and don't care much about the consumer. Some of their practices like sudden policy changes seem rather sleazy. We all know what happens when we play with fire. I prefer the idea of not using them at all. The idea of having the money BEFORE we buy something seems to have gotten lost .
You can easily get a loan for a mortgage or a car without a credit score, and any reasonable landlord will be happy to have a debt free tenant with an income and no credit score.
If you use credit cards and make regular payments yet your interest rates keep going up you can always shop around, there is still some competition among them; but if you keep running into the same issues time after time then it's probably time to re-think the way you live your financial life.
We all need lessons on how to live within our means.
Right-on!
It's good to see that 99% of the commentators have brains.
To the 1% of you smarting off about "personal responsibility," I have one thing to say. I am all about being accountable for my actions. If I am late on a payment, I see nothing wrong with paying a $10-20 late payment fee.
Raising my interest rate 15% and charging me a $40 fee, however, is completely unreasonable and predatory. I am no more risky because the mail held up my payment, and a $40 "fee" is insane. Since you most likely work for a credit card company if you are taking such an asinine position, tell your bosses, you know, the guys who are making their Benz payments on my bailout dollars, that consumers don't put up with bullshit forever, especially not American ones.
No, I don't work for a credit card company.
You obviously don't understand personal responsibility. If you pay your cards on time you will NEVER have to worry about high interest or late fees. That is the definition of personal responsibility. Most anyone who carries a revolving balance is not financially responsible. If you don't like the fees don't borrow the money.
What is asinine is expecting others to cover your own irresponsibility.
As to brains, my IQ is probably 20 points higher than yours, so don't think you're so smart.
Reallity,
I'm glad you have the psychic gift to judge how much higher your IQ is than others. I've always wanted that talent, so I'm a tad bit jealous. I'm also glad to see you have the time on your hands to reply to practically everyone on here to shame us all and defend the poor, innocent credit card companies, especially when you don't even work for one. The world needs more crusaders like you. It's disappointing you can't spell the word "reality" correctly, but you've already shown me you deserve my worship so I'll let you slide on that one.
Carrying a revolving balance is the prerogative of any one person. I have had to carry some moderately hefty balances in the past because of, A. Car Repairs, B. Moving long distance to a new home, and C. Medical Bills. I didn't have the money to cover those things, and a line of credit assisted me during those times, one of the benefits of using credit. Did you think everyone who uses a card spends their money on unnecessary garbage at the mall? Did you think we all have a pot of money to pay our balance in full at the end of the month? It amazes me that someone with your IQ would make such an assumption, but I'll let you slide again.
But alas, you've missed the whole point. The whole new law, and everyone's comments for that matter, aren't about "personal responsibility." They are talking about "predatory practices." Practices like hiking interest rates to loan shark levels, charging fees that are way too high, mailing bills a few weeks before they are due so they have a better chance of getting lost in the mail, and that sort of thing. No one on here has a problem with paying interest, or even a reasonable fee when we are at fault for being late.
Hope I could help. Have fun at your MENSA meeting.
I'm one of those "deadbeats" that almost always pays my credit card balance in full each month and I've never made a late payment. I just received a notice from my credit card company stating that they were increasing my interest rate by 2.6 percent. I was given the choice to 'agree' or forfeit my card. A perfect example of Howard getting screwed for Jake's bad credit. Credit card companies are indeed mean and there is no excuse for it other than outright greed.
Retired
If you don't carry a balance, what difference does you rate make?
I worked for a sub-prime auto lender. With all the talk of fairness one thing is overlooked: if you force them to do business in the way you think is fair, they will most likely stop doing business. Do you go to work every day with the goal of fairness overriding the goal of making money? Would you continue doing this when you are hungry and can't afford to pay your own bills? My boss was very fair. He directed the good re-payers to seek refinancing at a better rate after a year or two. Now the company is out of business. I almost lost my apartment. And those poor people you are defending? They just have to take the buss to work. Do you care what the outcome is? Or just the fairness? If you don't like their product, don't buy it. But don't disable everyone else from buying it.
I don't agree with the article, but everyone posting against it I also disagree with. You compain about your interest rates going up after missing a payment, late fees, other fees, etc. Why not set up an automatic payment? I use Amex, and I have it pay automatically. I never have to worry about missing a payment. Or use Bill Pay with your bank. All of you knew going into the fine print, too much to read to comprehend agreements, that you are going to have the potential to get screwed over. I put the blame on you too, not just the CC companies. Naive to think that you weren't going to get jacked with, especially when you agree to something that you don't understand - you knew the risk going into the agreement. Be responsible, and if you are bad at missing payments (which I learned I was while in college) set it up to do it automatically. I only have one bill a month I actually have to pay, all the rest are automatically paid.
Also, if these CC companies are so terrible and have poor models, why don't we see some good ole competition for new companies that are fair and don't lend to people with poor credit? You would think fair companies would start up and take the place of these monster CC companies of today...
texas07, while I feel it is my responsibility to make up for the one payment I missed in 2006, I don't think raising my interest rate over 20% for three years is a proper penalty for one skipped payment. There's a difference between being personally responsible and being extorted by a business because you had one lapse in payments.
Well, Texas, let's think about this critically, something a lot of blowhards from your state aren't too good at. (I know from experience, unfortunately.)
Interest rates should be based on risk. It makes sense. If your car breaks down or you have an unforeseen emergency, you can buy now and pay a reasonable rate based on how risky you are for the privilege of using someone else's money.
However, interest rates are often based on the predatory practice of defaulting cards to 29% when a person who carries little risk accidentally makes a late a payment. Unreasonable $40 fees on late payments and "going over the limit" add insult to injury. I see nothing wrong with a reasonable "late fee," maybe 10-20 bucks, but the majority of people feel current fees and default rates are preposterous.
This is what legislators are for. They can make laws to curb harmful behavior like this. I applaud when time spent in the House and Senate is used productively. Sometimes legislative time is wasted. There is actually a bill in your state Rep. Jessica Farrar, D-Houston, is trying to pass that will reduce the penalty for murdering a baby to 2 years in jail. Link:http://www.nbcdfw.com/news/local/Texas-Could-Be-First-State-to-Have-Infanticide-Law.html Let's be happy when time is spent making laws that will protect the consumers.
And why doesn't some young entrepreneur start up a new credit card company? It must be as easy as starting a scrap metal yard, right? Maybe it's because you need billions of dollars to lend to people, contracts with hundreds of thousands of merchants so folks can use your card, all the capital, both human and otherwise, required to start a massive business, etc etc. If there is a prime example of an oligopoly, it is the credit card industry. (People who use Discover or AMEX can testify to this.)
I hope that helps. If not, please stick with watching Longhorns/Aggie football games and leave the thinking to us.
I'm not saying that what they do isn't right, just that I don't think you can place all of the blame on them. I think there needs to be reform and welcome it. BUT, you seem bright and knew that those ridiculous penalties and interest hikes existed. It happened to me too... and the next day I set up automatic payments and told myself lesson learned.
Schaffer-I still check my account every month to make sure it works. I don't foreget about it. Most peolpe who budget their money check their statements and payments.
Given that no system is perfect, what do you do when the automatic payment system fails to work?
Simple: Keep the documentation that you set up autopayment for your account minimum. This certifies that if the autopay system fails to work it's the credit card company's fault not yours. Do this for every card you have. Keep the documentation.
They can't hold you liable for a failure in their system.
Except that mistakes such as this get put on your credit history and are almost impossible to rectify. Then you get to spend untold hours of your life trying to fix their f**kup. Have fun.
Credit is EVIL! There is a reason why loaning money was considered a major sin in the middle ages.
The only credit that should exist is that controlled for the purposes of major expenses, like buying a home, car, or medical bills.
What we have allowed over the last 40 years is to build our economy on air (credit money is not really money, but just an "IOU" with interest). Basically, legalized loan sharking. This has allowed greedy people, businesses, politicians, etc to make the income numbers look good for shareholders (who think they have money now, and go borrow more money).
I am a small business middle manager dealing with the base consumer, and for the past 5 years, most of our transactions have been with credit cards. Now my customers have maxed their cards, stopped buying more product (forcing layoffs), and are filing bankruptcy to clear the bad "air" (credit debt).
The sooner the credit card industry goes under (or is cut back about 85%) the sooner this country will prosper again. We send our "real money" to buy beans and bullets for Iraq and Afghanistan, comfort aid for distant places who would rather spit on us than say thank you, or have the money wired out of the country to immigrant's families or to pay China to fill our landfills with junk.
We need to make our own stuff here in America with American people, and that includes our money.
You cannot borrow your way out of debt. Our current circumstances would have occured back in the 80s if we had not delayed the inevitable recession by using credit.
Compare this to the Madoff Ponzi scheme. Borrow money to pay to the last guys so you can borrow more to pay the next guys, etc. We have been doing this on the national level for a long time, and the margins just got called...
You would prefer to go back to the middle ages now? Where usury fees were a crime? You can do this by going to a third world country, but don't wish it on everyone else.
The legislation, in light of the posted analogy states:
You cannot try to loan Jake's teenage daughter money.
You cannot change the terms of your agreement with Howard or Jake after the agreement has already been made
You cannot penalize Jake for no reason
You cannot tinker with the due date to screw with Jake, who is honestly trying to paying his debt on time
Who in their right mind is opposed to those things?
OK, I pay my credit card bill in its entirety every month. I don't pay an annual fee and I get reward points. They want to raise my rate, do I care? NO!!! I pay my entire bill every month so there is no balance against which to apply the rate.
I have cancelled cards because of outrageous fees, but I shopped around for the best deal for my situation. If my current card holder wants to jerk me around and somehow ends up with a way to get more money out of me, I'll go elsewhere. Think Credit Unions!!!!!
HI George. Nice to know there are a few other sophisticated users of credit out there.
GOOD POST!
In the past credit cards were instruments for making deferred payments.
Today they are the only method of payment in many parts of the economy.
Arguing percentages and fees is missing big reality. Credit cards are now
less corporations then private mints. It's a very medieval economic model.
The one important thing that everyone commenting on this is missing is that credit card "loans" are given on a monthly basis. The loan is a one month loan and is due at the end of the month! If you carry a balance you are in effect taking on a NEW LOAN. Every month CC companies have the right to change the terms of the NEW LOAN. Try reading the card agreements before running to the mall to buy stuff you can't afford (all the fees and the rates are specifically laid out). If you don't agree with the terms or to don't understand the agreement DON'T USE THE CARD!!! Nobody is forcing you to use the credit card. I can't believe everyone is this country that wants Uncle Sam to hold their hand. It is absolutely disgusting.
"I can't believe everyone is this county that wants Uncle Sam to hold their hand."
You mean like the banks getting billions of dollars in bailout money? (open mouth, insert foot.)
I have some credit card balances, and the money went to necessary car repairs and medical bills. I have never used a credit card at the mall.
I've also had a few defaults/fees because my payment was lost in the mail.
I don't want Uncle Sam to hold my hand like Bank of America apparently does, but if the legislators would pass some laws to curb shitty practices, that is ok by me. After all, that is their job.
I don't recall ever mentioning that I agreed with the bank bailouts - so please put your foot down and reply to the actual comments I made. The fact that your card balance is due to necessary expenditures, doesn't even address my comments on understanding the card agreements before using the credit and the fact that their right to change interest rates and fees changes with each NEW TERM OF CREDIT that they issue you every month they ALLOW you to carry a balance.
If you are worried about checks being lost in the mail, use online pay or send via an efficient mail carrier such as fedex or ups (your "lost in mail" comment only strengthens my argument since I presume it was Uncle Sam's USPS that lost your payment, wasn't your fault that you didn't make sure that your payment was recieved on time). Your Uncle Sam will make sure that you aren't charged fees for any "lost in the mail" payments in the future.
I guess once Uncle Sam owns all the banks, car makers, and pays for your healthcare you'll be set. You will get free credit cards without any fees and a standard 5% rate for all, your hybrid/ethanol deathbox will come with a lifetime government warranty on all repairs, and no more medical bills. Congratulations, you won't even need a credit card.
You said "I can't believe everyone is this country that wants Uncle Sam to hold their hand" in a comment that seemed critical of consumers and supportive of banks. I was pointing out that banks are the ones getting huge handouts from Uncle Sam. The same banks who issue credit cards. (open mouth, re insert foot.)
Known for lousy service, Bank of America is not typical of all banks. Try getting a card from your local bank or your credit union. Then put an automatic payment to them for your payments. Then you can speak with a real person who knows you if you need assistance.
I do have an economics degree but I am all for the new bill. Credit has needed to be tightened for a long time. Most of the problems we have been having recently have been tied to bad loans that were supposedly "guaranteed".
*The points people have made are good ones. 3-4% one every purchase just so the merchant has the right to accept the CC.
*Outrageous fees and interest rate hikes on the FIRST late payment regardless of history.
*Adding that new interest rate to existing balances!
As to the person who used the "sister" analogy. Well done. And to the respondents. Fifteen years ago I was buried in CC debt. I got out. I bought my house for CASH I bought my car (a few years ago) for CASH. I check my credit rating and it is FANTASTIC.
How is this possible? I have a cable account I have a gas account I have an electricity account etc, etc, etc.
The Credit Report Bureaus report on everything your name is attached to. I could borrow a million with just my signature tomorrow if I wanted. My personal banker reminds me of this from time to time.
fifteen years ago I was flat broke all the time. Buried under a mountain of debt. Today I live better than I ever thought possible.
Don't let the idiots fool you. You can get a fantastic credit rating without ever using a credit card.
Food For Thought - In the last 12 years I have saved approximately $231,000 in interest payments on the house and car and not using credit cards. That basically gave me a $19,250 a year raise.
Too many people confuse "economics" with "business." What you're talking about here is the credit card companies' business practices, steeped in what amounts to an economic tangent. Let's pose a more realistic scenario using characters from your example that more closely mirrors the current situation and why consumers and those in congress decided action was necessary.
For whatever motivation, you loan money to Mom as well. The regulatory and economic climate has become something of a "money party" and there are any number of lenders out there looking to loan money to Mom. So despite the fact that Mom is no more credit-worthy than Jake, you loan her money at the same interest rate as Howard, despite the economic contradiction. Sadly, Mom defaults. Your bottom line begins to suffer. All this time, Howard has been fastidious and has paid his obligations to you on time each month.
Your solution? Raise Howard's rate to mirror Jake's and make the rate applicable to all outstanding balances. Why? Because you made a poor decision that has come home to roost and you need money. But you know that if you limit the rate increase to future purchases, Howard's simply not going to use the card anymore. So you apply the rate increase to ALL balances as a means to guarantee a larger income stream because it's not likely every "Howard" out there who owes you money will pay the balance off to avoid the higher rate.
It's not so much the Jake's of the world are being "victimized" by the evil credit card companies. It's that the Howards of the world are being punished for the poor lending practices of those who issue the credit cards and other loans.
No one should begrudge you charging a reasonable fee for your services. And frankly, if you wish to up Howard's rate to 25% from 5% in one month, despite Howard's exemplary consumerism, that's also your choice. What's at issue is the less noble practices credit card companies employ to make a buck, then passing the failure of those practices on to the Howards of the world. Practices such as giving credit cards to 18 year olds with no reliable source of income, offering low rates to "hook" Howard then raising his rate repeatedly, and/or raising interest rates at-will on existing balances knowing full well that your customers are unlikely to be able to pay the balance in full to avoid the higher rate in an effort to recoupe losses from poor investment decisions.
If consumers should be expected to "own" their own financial decisions, so should lenders, which has traditionally not been the case.
LA2047 wrote, "Too many people confuse 'economics' with 'business.'"
What an understatement.
I don't agree that CC companies are Monsters. However, for the sake of the discussion, if they are, there was only one way for them to get there. They were enabled by the the publics insatiable appetite for more, more and more-- that's the Greed -- that people could not afford. Credit cards are not a "RIGHT" they are a privilege and a Choice. Banks are not charitable organizations--they are out to make money--as much as they can--just like any other business large or small, just like you and I. I have never posted on this site or any other without noticing that as soon as personal responsibility or personal choice is mentioned, people have no response. They just don't want to deal with it. It's heartbreaking! The need for someone to blame outweighs everything.
As LA2047 points out, personal responsibility only seems to apply when discussing individuals who now owe too much money. Where was the personal (corporate) responsibility of the CC Co's when they set up this system? As someone who worked there, I can absolutely assure you that our interest was in profit maximization--NOW, not 25 years from now. That is not personal or corporate responsibility. Publicly traded companies are unable to be personally or corporately responsible because if they attempt to be, and a competitor earns a higher return for the shareholders, the personally/corporately responsible CEO is replaced with someone willing to earn the same returns as the competition. That's why govt. is forced to step in where no one really wants them--individuals didn't/couldn't wouldn't understand what they were getting into with the CC Co's and the CC Co's didn't, couldn't and wouldn't limit themselves. Credit card companies absolutely prey on the most vulnerable segments of society--that's where the highest returns are.
I sincerely hope you don't change your tune about personal responsibility if you happen to have a medical emergency and/or a layoff. That's where most bankruptcies in America originate--people who were so personally irresponsible as to get sick or to get laid off.
What a bunch of crap! Credit Cards are legal contracts. It makes no sense that they should be able to unilaterally change any of terms and conditions. It's as simple as that. For current contracts in force, a law was prudently needed to prevent the same. There is nothing more to say. Well, there is but I am sure it would be censored out of existence. For God Sakes, are all coporations run by idiots?
You assume a bilateral agreement rather than the typical boilerplate that you simply must sign. When companies get too big and dominate the market, only government and legislation can even begin to help to modify the bad practices.
On the fact that these are contract, we agree. I believe that we should make big changes in usury, give us back the tax write off for interest, and back major purchases by gov't for "credit-worthy buyers to make major purchases that are good for the economy.
I once thought The Atlantic offered a more in-depth and reasoned analysis of issues like this. This over-simplified tripe is pathetic. Clearly from the comments, the vast majority of readers understand the actual situation far better than the author who wrote this condescending, apologetic piece for the American Bankers' Association. Yes, this is exactly how the ABA wants us to think the industry works. Glad to see that the readers are not ignorant. If they have to issue less credit, good. No one is suggesting they shouldn't make a profit. They are just too predatory, and regulation needs to reign them in. Boo hoo.
Ezekiel 18
13 He lends at usury and takes excessive interest.
Will such a man live? He will not! Because he has done all these detestable things, he will surely be put to death and his blood will be on his own head.
REVENGE !
DEATH TO USURERS !
I think that BOO HOO should be assigned to this nation of greed and Sheep that allowed it to happen to begin with. The "fine print" has not changed since the beginning of any industry that Lends. It has been SOP and an industry standard from the beginning. Ignorance is not an excuse.
If this business model worked so well, why did you take our money in the form of bailouts? As a true American Capitalist, I believe in innovation. Why are we so concerned about protecting an old model? Apparently, credit is now necessary and therefore should fall into the public domain of accessibility. A private market for "luxury" cards will develop for the privileged.
From a journalistic point of view, take the pen away from this fool.
No head in sand just sand in head!
I am not saying there is no need for reform. I am just saying that people had the means to be well informed and ignored it. I would not have Bailed Out a single one them. I am perfectly willing for the failure to begin and begin again from the ground up. I'm very willing to take the fall and then make it better. This is not "new" territory and has been a LONG time coming. But the public was so into having what they wanted, when they wanted it and pay Tomorrow--- Until, they couldn't and now they don't want to shoulder any of that responsibility. I am always hesitant to give the government more power. They don't have a good track record and it always reduces our personal rights and privileges. There is that price to be paid. And that is what I call the making of our nation of sheep.
While I am not for "big government" I am for the government protecting its people from crooks. The government actually has a pretty good track record...just not recently. Remember - slavery, denial of equal rights for women, and segregation were all once legal...our government abolished these over time. If we had just left it to the business men would slavery have ever been repealed?
I agree that some people "deserve" to fail. However, I don't believe that the millions of people who fail because they fall on hard times (like the millions of currently unemployed Americans who lost their jobs during this mortgage meltdown that they had nothing to do with) and then are kicked in the teeth, and the head, and the crotch by the unscrupulous loan sharks we call credit lenders deserve this fate.
We must return ethics to credit lending. It is definitely possible for lenders to make a fair profit while being fair to their customers. The problem is that the credit card companies want to make an obscene profit.
Besides, we are looking for fair lending practices for all, not just the ones in trouble.
Yes, there is a lot of suffering out there. But those who are now unemployed wouldn't be suffering as much if they hadn't racked up credit card bills. Those who responsibly pay off their balances monthly have a lot less suffering in hard times.
Yes, credit is necessary! But why a Mansion when a 4 bedroom Ranch will do just fine. Therein lies that personal choice and responsibility.
Why are bosses that live in mansions allowed to pay their employees only enough to live in an efficiency apartment? Why do little kids get cancer? Why is there a blind homeless guy in a wheelchair outside my office building?
It's all because the world is a f**ked up place, Gypsy.
Of COURSE credit ISN'T 'necessary'. Maybe you've been bought up to believe there's something respectable about borrowing money to buy your latest shiny gadget but - honestly - you look really tacky next to the guy who's worked hard and SAVED UP for his.
Excellent post, Dean. Living within your means--what a concept!
I believe that people should be able to make their own choices and follow so called personal responsibility, but obviously many people cannot. The card companies are loan sharks. They use terms outside of the scope of understanding of most people who are not lawyers. The terms, to anyone that does understand them, are not fair. Period. How can a company unilaterally raise the rates on a loan (that's a contract) based on the actions of the consumer in another of that consumer's contracts? I'm speaking here about cross default. This practice might be ok in the business world where each party is backed by counsel, but to expect it for consumers is ludicrous. Also, raising rates on the balance people are carrying based on one late payment is just not fair and by it self makes the consumer a default risk. People plan their spending in part based on interest rates. Companies should not be able to force their "customers" to become cash cows or file for bankruptcy (or just default). The company hopes for the poor shlub to just keep paying the rate and not file bankruptcy (add in the bankruptcy changes they were able to get passed during Bush's presidency and you have a perfect situation for the companies). There are other bad practices, but...
Anyway, in general we can all agree that the industry has used some pretty shady practices in the past. The problem is more fundamental than this, however. The real issue is that our society has become hyper-dependent on credit and we (the majority of the people) have not learned what it means to live under this situation. Either people should be educated on what credit is and does or they should not have access to it. If people know what it is that they are taking on and yet they still screw up, then fine, let the company have some options. Otherwise, why should we let the CC companies turn some portion of our society into de facto slaves? Educate the people so they can make informed choices, or protect them from those that seek to take advantage of them. Mandatory personal finance classes (note plural) in high school would do the trick.
First of all, the credit card company is not my mother and doesn't know that I lost my job or crashed my motorcycle. As long as I keep up with the payments all is well...Well, not exactly.
In the 90's many credit card companies were in the habit of increasing my available credit without me even asking. My credit scores we're in the low 500's so THEY KNEW FULL AND WELL THAT THEY WERE TAKING A RISK, but they just kept on increasing my available credit and I, STUPIDLY, just kept on spending. Yes, they were egging me on and I took the bait. I ended up with 14 credit cards and a revolving balance of over $60,000.
These days I've been a good boy and have a credit score of 815. And what do I get as a reward? Unadulterated grief. Like many of you, your banks have changed perhaps two or three times over the last few years. I started out three years ago with a credit card, checking and saving account at the bank of New York which two years ago merged with Chase. Result lower interest rate on savings and higher interest rate on credit card-----through no fault of my own. I had another Credit Card with Providian which was bought out by Wasington Mutual, which was bought out by---you guessed it-- JP Morgan Chase. Same result...immediate 3% increase in the APR.
You guys that blame the consumer and defend the banks need you head examined. You say that WE, the consumers, need a lesson in basic economics. I beg to differ. The last teo years have shown us that even with loan shark type of practices many banks have failed to understand basic economics practices and as a result have gone under.
And who is there to rescue them...yes the consumer with our tax dollars, higher interst rates, excorbitant fees, and fine print that you need a microscope to read and lawyers to understand.
Nuff said.
I love you Beamer! :-)
It's amazing. I'm an avid reader of the Atlantic and these blogs, and yet it is one of the most intellectually dishonest posts I've yet to read that generates a link from the Google aggregator and a billion comments.
Excerpt for FORTUNE article today -
"The firm says notes due to mature next month won't be repaid in full on schedule. Advanta is offering to buy some bondholders out at a roughly 30% discount....."
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Notes due to mature next month won't be paid... but Advanta is offering a 30% discount??? 30 cents on the dollar...mmm Maybe the note holder should raise Advanta's rates to 25 or 30% since they'll be "late payer" No?
Or better yet maybe I should be late paying my CC bill next month and then offer THEM 30 cents on the dollar the following month. HAH! Fat chance!
one more excerpt, all the business experts and economists take note...
"Advanta may have made its problems worse by jacking up some customers' interest rates, prompting them to cancel."
Just a thought.
Strange that credit card companies in South Africa are doing quite well but the punishing penalty system in the US is unheard of there. In the event of one exceeding ones credit limit they simply charge the current interest rate with a kind reminder to get one's act into gear.
Daniel Indivilgio you are god. thank you mr wizard for making this all manageable for us average working class citizens. Belive it or not i am tradesman with two boys who actually happen to be named Jake and Howard. Your analogy is a real laugh, its so close to home. It's hard to charge interest on your kids because they always run out of money after paying me for rent, appliances, food, the car i let them buy off of me which theyre still paying off. making money off your kids loans isn't easy when they only make what little money i give them for doing their chores. but in the end it will be ok, because the longer they take to pay me the more money i make in the end. so really in truth, jake was the best investment i ever made.
Daniel Indiviglio MAY be a good writer but he don't know Butkis about credit cards, money, OR the credit card business. At least not if one is to look at his current offering on the matter.
In his childish analogy of the brothers, he naively attempts to make a credible case for discrimination against one as to the other. While it is perfectly NORMAL and rational for a credit lender (credit cards are merely a revolving credit instrument-paying on the outstanding balance every month) to refuse to loan money further to one who has no visible means of paying it back (Indiviglio's asinine assumption of one of the brothers condition) there is NO rational reason to jack up the contracted rate as if that will make everything alright-it WON'T-it will only exacerbate the problem. Jacking up the contracted interest rate is ONLY a proper response on the front end of the contract (when applying for the card) as it is ONLY at this time that a true assessment of the applicants ability to py can be ascertained. If he HAS no job and NO verifiable means of a steady income WHY extend the credit to him in the first place.
But Daniel Indiviglio's silly comparisons go on. He speaks of the credit card "juice" as a methodology of getting their money back with a profit. BS baby. If the interest rate were a 1000% a month you could not hope to recover your original loan if the creditor does not pay it back. You make your money (as a lender) on the fact that the loan principal is paid back and enough "juice" is charged to cover all of your operating expenses. But Daniel Indiviglio speaks of the jacked up rates as being a protection against these losses. Again BS baby.
The credit card racket in this country is a scam pure and simple. It is based on the concept of "whatever the market will bear". Since most people from time to time will get out of kilter with their monthly payments, the credit card companies have rigged the books to reflect that fact. It used to be a legitimate fee for missing a payment but they found out that the user would tend to overlook this minor impediment in exchange for keeping what to them has turned into a lifeline for operating in this society. You need a credit card to rent a car, stay at a hotel, get on an airplane (unless you are willing to undergo a 5 cavity body search in the alternative) and host of other "societal necessities". A credit card is almost as vital as a SS number when applying for credit in this society.
IF Daniel Indiviglio would care to know about the real means of conducting a loan business I'll tell you how it goes. You take stock of your TOTAL loan market-ALL of the people who will be using your product. You THAN determine by calculation OR by experience, the default rate of this TOTAL outstanding portfolio. Say it is 5%. A really high number until this recent downturn. IF the total default rate on the portfolio is 5% than your COST of doing business is your office overhead PLUS the default rate of the portfolio. The way you PRICE your product to the public is to add the portfolio default rate in plus a markup rate based on your operations expense (sales, rent, electricity, yada yada yada, and THAN you add a percentage rate to the price of the product that will reflect a REASONABLE yield on the portfolio. Lets say that the cost of default is 5% and the operating cost overhead is i%. Your built in overhead is 6%. Add to this a percentage of "juice" for the investment portfolio (the amount you hope to entice investors to the trough with) and you have a business model to work with . ANY more juice and that is considered usury.
Think this is pie in the sky? well, this is EXACTLY how the mortgage industry works. Did you ever wonder HOW the student loan program was structured? Up front you (the studentee) were charged a flat fee say 3% of the amount requested. Why was that? Well, it was to defray the ACTUAL fact of student loan default rate. Factor in a reasonable rate of return for the lending institution (they had NO risk whatsoever on this type of loan) and you had the total cost of the loan bundled up into the contract. 3% for anticipated defaults and 2-3 percent fotr the juice. No one LOST anything because the REAL danger to the portfolio was covered up front by the 3% and everyone lived happily ever after on the 2-3% juice built into the loan.
But the Credit card companies can't leave this alone. They are essentially unregulated and to the extent that they ARE regulated, they get around this through fees, late fees, posting fees, going over the limit fees (did you ever wonder how they could look a customer in the eye and say THIS is a fee for you going OVER your limit when it is within the power of the card company to CUT YOU OFF when you attempt to go over the limit by one single dime) and on and on.
This fee crap and exorbitant interest rates ain't about the credit card companies attempting to "cover their losses". It is about greed pure and simple. Think I am lying? Just take a look at the RPOFIT margin on their portfolios-even in this time of depressed consumer spending and default. They want the LAST DAMN DIME from your wallet. And Daniel Indiviglio writes an article telling you it is all about the credit card companies just trying to survive. GIVE ME A BREAK!!!
Darrow...for the Prosecution.
Darrow:
If you pay your balance each month there is no monthly payment to miss. If you can't pay that you probably overspent. Yes, there are a few emergencies, but they should be paid off ASAP. If you are dumb enough to just pay the minimum you DESERVE to become a slave.
Your math is really fuzzy, and if you want to compute rates then YOU loan money. If you don't like the terms, don't borrow.
Yes, a credit card is necessary for many modern services like renting cars, hotel reservations and on-line purchases. But no one is forced to run a balance on the cards.
As for over limit fees--if you don't know your own limit and are spending when you're close enough to the limit to generate fees you are being irresponsible. Why should a nanny bank have to tell you that?
Reallity,
How much time do you have on your hands? Really? You live in Hawaii and have the free time to give a smartass reply to everyone on this message board, so I take it you have a rich daddy paying your bills. How else can you take such a bullheaded and naive position?
Not everyone can pay their balance every month, and that is their choice. Credit is a useful tool if it is used correctly. There is nothing wrong with paying partial payments, that is a part of what makes credit useful.
In the last couple of years, I, for instance, moved 1000 miles away, had a baby, my dad died, and I had a few pricey unexpected car repairs. I didn't have the cash to pay for those things, so I used credit. There is nothing irresponsible about using credit so long as you're not wasting money on unnecessary goodies at the mall.
However, one time one of my payments got held up in the mail and was 2 days late. 2 days. They jacked my interest up 15% and charged me a $40 fee. Was I any more risky? Was I lacking "personal responsibility?" Were their fee and rate hike reasonable?
It is the credit card companies that have abused the system, not "irresponsible" consumers. Get your head out of your ass.
kiddbilly3030
I work 70 hours a week setting up payroll processing for small businesses and running my small farm. I pay all of my own bills--wish I did have that rich Daddy you refer to. My late father, however, was rich in wisdom. He ALWAYS had 6 months household budget in the bank for emergencies. Being a smart-ass son, I didn't listen, so I was on the credit card slave program. I learned better and struggled and paid off the balances. My position is fiscally sound, not naive. If you have savings, many of life's unplanned events can be paid for in cash.
I only spent time replying to this blog because I am tired of paying for other people's problems--such as the sub-prime mortgage bail-out. I bought the small farm last year--25% down, fully qualified for the 15 yr fixed mortgage at 5% interest. Could have bought a larger, nicer place, but these payments are same as rent, so are affordable. Last year my car died. No car, no work. So I paid cash for a used Buick instead of payments on a new Caddy or Prius. RESPONSIBLE LIVING. I bought what I could afford and resent paying for others who didn't. I noticed that most of the Mainland foreclosure victims interviewed on TV are in front of a McMansion and with a new large SUV or other newer car with payments.
You are correct that unplanned events happen and sometimes there is a need to carry a balance. For those who don't pay balances each month, set up an automatic payment system with your bank or use the CC company's free on-line bill pay. That way you avoid the late payment trap.
I use my cards for the convenience of not carrying cash, warranty back-up on purchases, buying on-line, for renting cars and air tickets, and the cash-back they give me.
As for the interest rate changes, etc, you are correct that SOME banks have abused their card holders. But it is not fair to claim that ALL credit card issuers/banks are abusive.
By the way, the worst abuse I ever had from a credit card was MACYS, not a bank. ($25.00 late fee on a $6.50 balance!) So I don't shop at Macy's much any more.
Reality: both some credit card companies/issuers and some credit card holders have abused the system.
Sorry, I didn't realize that responsible living was smart-ass or having my head in my ass. Guess I shouldn't be responsible.
THIS IS A REPLY TO THE MESSAGE BELOW ME. For some reason it won't let me reply directly to that message.
Reality,
As to your straw man argument, again, I have no problem with responsible fiscal strategy, I have a problem with "predatory practices."
If anything, as a proponent of living responsibly and accountability, you should be happy with recent legislation; I would say the recent changes in bankruptcy laws was a bigger nod to making people accountable for their actions than any harm caused by the credit cardholder bill of rights.
The credit cardholder bill of rights is only trying to curb predatory practices.
"If you are dumb enough to just pay the minimum you DESERVE to become a slave."
And if you're dumb enough to build a business model based on marketing and selling products/services to customers who, in your words are so dumb that they deserve to be slaves, then you deserve to go out of business, or at least be regulated so that you don't go out of business.
I fully agree that some card issuers are abusive. I get their solicitations weekly. And some of these companies DO deserve what's coming to them. However, it is unfair to claim that all card issuers are abusive. Many local banks and credit unions offer great rates and benefits. They do expect you to qualify, however.
But, if a cardholder is only paying the minimum monthly payments on their card(s), they are over-extended, and making themselves the slaves.
Responsible card usage would indicate paying the most you can each month, not the minimum.
Good points, but there's a time in my living memory when ones WORD was good enough to reserve a hotel room, or arranging a car-rental.
Of course credit-card companies have encouraged hotel chains to switch to their way of doing things, but all they've actually done is to insert themselves as middle-men in what was otherwise a simple, two-party business exchange. I want a room, I book it with a hotel. Yes, I'll happily pay cash on arrival.
It's only the dumbness of the average consumer who thinks there's any benefit to them in allowing Visa, AE or any of the others to get involved in that transaction.
Take it one step further - if consumers en-masse refused to supply a credit card as confirmation, the hotel & rental companies would soon revert to the historic methods of trusting their customers, else run the risk of having empty rooms and full car-parks ...
Dean
How does one do business on-line with cash? Living on an island, many things are not available locally, so have to be ordered on-line and shipped. A GREAT advantage to using a card in this situation is that you have recourse in the event the seller doesn't send you your paid for items, or sends the wrong item.
Like you, I also remember when most people were responsible enough that a hotel could take your word for a reservation. The unfortunate reality today is that many people make reservations and don't honor them unless there is a financial penalty. (several friends have Bed & Breakfast operations here in Hawaii).
As to rental cars, how many people do you know who should be trusted with a $20-40K vehicle without some collateral? And using my Visa saves me the rip-off $20 a day collision damage waiver (Visa guarantees that by using their card.)
reallity in Hawaii - a DEBIT card system would allow on-line transactions of this nature. It would work exactly the same way, except it debits YOUR bank account, not some third-party. The money is taken directly from you and therefore you make sure there's enough money in your bank to handle it.
This enforces the good state of business without debt AND encourages the moral position of being able to afford what you buy.
I live in Holland, and this system works fine here where we're pretty much avoiding the 'recession' as nobody really owes much money to anyone.
All the best
D
Your comment that my MATH is fuzzy only goes to show YOUR fuzzy grip on the world of finance.
HOW can a bank make money on a loan for a house for 30 years on a rate of just 6.5% if my MATH is fuzzy? The issue is simple. Each and every month that you make a payment you are paying back 6.5% (divided by 12) of the outstanding balance. The bank (or loan servicer) takes out their 'fee" for handling the paper each month and the balance goes into the pool for the investors. There WILL be foreclosures. Probably in the neighborhood of 2-3% OVER the life of the loan portfolio. This is FACTORED into the interest rate calculation.
That CALCULATION is essentially THIS; current cost of debt money in the market place. Plus overhead, Plus an amount of juice that you THINK you can get away with for the next 30 years. NO MORE.
The limiting factors here are the CURRENT MARKET'S WILLINGNESS to take X as their yield. Yield being the residue of cash LEFT after ALL expenses and losses are taken. 3% yield in a marketplace of Fed rates of 0% at the discount window is bordering on usury in the mortgage industry historically.
When I purchased our home in 1979, I borrowed $54,000 at 10%. YES, TEN PERCENT. Did the mortgage lender make out like a bandit? NO. Look back at the times. the COST of money was ridiculous, running as much as 21% at the discount window than. Thank you very much Jimmy Carter. The "deal" was struck on a Friday and both the COST of the loan to the investor and the anticipated loss (I was backed by the GI Bill-No loss need apply to this loan) was calculated out and the juice was put on the loan and out popped 10 %. It went to 10.5 the following Monday.
Was 10% a lot of money? It WAS to me. it was as a historical point too. Did people "make out" at my expense? I don't think so. What I DO know is this, loaning money was a VERY risky business back than and the COST of money was high. Also, the UNKNOWN of what would come in the future was in the room (that 800 lb gorilla) in the form of the unknown future and possibly war (Iran hostages) and possibly an economic collapse due to tenuous fuel prices. All these things are a factor and WERE a factor in the pricing of my mortgage. And of course there is the large comfort that upon failure to pay, the government would step in and make it right.
This last point, the unsecured nature of credit cards is the ONLY dissimilar factor to give them ANY shelter for rates over and above cost plus. But again, look at the record for the default rate and actual yield declination and apply a rate to THAT factor. I assure you, it WON'T be 29%.
You agree with me that credit cards are an essential for getting on in this world and in the same breath you take the cavalier attitude of "if you don't like the terms, go without". Well, all I can say is that farm you bought, if it has a house on it, it must SURELY sit high on a prominent peak. I guess all of your extra-island needs are shipped in via Fed X in large crates equipped with strapped on J-Dam fins http://en.wikipedia.org/wiki/Joint_Direct_Attack_Munition and programmed to hit your particular X Y coordinates. It MUST be nice to be OF the people and yet so far removed from them.
Indiviglio’s simple-minded example and gross generalizations are neither credible nor informed. He thinks that “some external reason that has nothing to do with the loan” justifies increasing interest rates, in the absence of relevant reasons and evidence such as late or missed payments. Since a larger proportion of African Americans are in prison, why not increase the rates of all African Americans? Since those who are morbidly obese or smoke are more predisposed to negative health consequences that may affect their employment, why not increase their rates? What about spouses who commit adultery or drink heavily, which may increase their likelihood of divorce? Wouldn’t they be more of a credit risk if forced to pay alimony and child support? Why not increase the rates of all seniors, who risk inconveniently dying?
Indiviglio naively assumes that “complex models that include dozens of variables consisting of different customer characteristics” accurately produce “a rigorous, highly tested credit recommendation” quantifying risk because “[t]hey literally have math and statistics PhDs who are in charge of this stuff.” Corporations rarely, if ever, publish their models such that they can be independently tested for rigor and predictability. Having a doctorate in mathematics or statistics does not necessarily assure competence in financial modeling or even a rudimentary understanding of finance, as attested by the collapse of the financial institutions where they were employed.
It is amusingly pretentious to think that understanding increasing interest rates based on hidden assumptions unrelated to actual evidence of payment history requires a class in economic theory. Corporations are in business to make a profit, and self-serving rationalizations and justifications are the purpose of public relations. Given this weak commentary, can Indiviglio be assured of steady employment that possibly he is a risk and his interest rates should be increased?
Kudos to your comment. I think Indiviglio owes its reader a response.
Everyone here is missing the point.
If someone is to risky to lend money too, don't lend it. Period.
Lending money to a high risk person at high interest rate is taking advantage of someone's weakness.
Secondly, credit card companies make money on the back of merchants regardless whether you pay off your card or not.
You completely skipped over the fact that companies like Chase are changing terms on existing loans (ie. the funds have already been borrowed). In some cases rates have been more than doubled and monthly/annual fees that were not within the original terms have been added. The only opportunity to "opt out" requires the borrower to repay the loan in full within a certain time frame (ie. 25k within 30 days), which is of course not going to happen. These changes have absolutely nothing to do with the actions of the borrower but are specifically geared toward reducing risk and increasing profitability because of "the economy".
I'm curious as to the writer's relation to credit card companies.. it sounds like he was at one point call center supervisor in charge of convincing everyone else that the company's policies are always justified. I completely understand where he is coming from, but he is ignoring all valid points on the opposing side of his argument.. which just devalues his opinion and this article in general.
daphne
If your rate is arbitrarily changed, you can avoid that hike ("opt out") by closing the account and paying the balance on the original terms. It does not need to be paid in 25-30 days. But that card or account cannot be used again, or you will automatically agree to the higher interest by using the card after the notification of the rate hike. This may not apply if your rates were raised because of late payments, etc.
I do agree with the numerous posts criticizing the author. The original article is not well researched or fairly balanced.
What a fairy tale.
I used an unnamed bank (which is now receiveing a bailout with MY money) for my small business. I had a $10,000 credit line at 6.5% which I ALWAYS paid on time. Quite often, customers would pluralize the name of my business when writing checks (''Motorsports'' instead of ''Motorsport''). Whenever that happened, I would simply deposit the check via ATM, and it always went through. One time I received a pluralized check from a customer and I needed the funds to pay my credit card bill. So I took the check directly in to the bank and spoke to a ''Customer Service' rep, just to be sure there wasn't a problem. Well, it went all the way to the manager, who refused to accept the check. When I very politely requested that she call her supervisor, she sat down at a desk and started ordering toilet supplies for the bank's bathroom, etc. She let me sit there until the bank closed at 6PM -- at which point my credit card payment was late, and the interest rate went up to 18%.
A way to treat a valued customer? I think not. So whoever wrote the fairy tale above: Try using your time to get to the real story, not just a press-release from a bank. You are telling only half the story -- and it's not the half that needs to be told.
This article would only be accurate if the market worked and incentives were correlated with actual profits. High risk cards with high interest rates show paper profits on presumed income on which executives earn huge bonuses—just as bankers earned bonuses on mortgages doomed to foreclosure and loss. The cardholder need not actually pay off the debt for the executive to earn his bonus. When the debt goes bad, the bonuses are not recovered.
Denying cardholders a way to clear debt though bankruptcy keeps these hopeless debts on their books, making paper profits and extending foolish bonuses into more years.
This house of cards is about to collapse like the housing market, but we will continue paying the bonuses for profits that were illusory.
I think this action might help gradually deflate the bubble. It will increase the incentive for lending to people with good credit because they will have to pay more and lower the incentive for lending to people with bad credit because their relative cost will be higher. The one thing that the regulators need to do is to make sure the companies are not selling bad loans with good ones the way they did with real estate.
Dare i even comment? or am i just beating my head on the wall?
Dear reallity in Hawaii,
for a man who routinely works 70 hours a week you sure have a lot of time to spend commenting on blogs... or is this part of your job?
p.s. hundreds of thousands of people in this country we're like your father. except many of these people had more than 6 months worth of savings, they had their retirement, 401k, bonds, and their emergency savings and we are supposed to think that it all disappeared due to "irresponsible spending"? in my case and in my parents case i can testify that we never use credit to pay for anything that is not absolutely nescessary, yet this way we still end up getting stuck in debt. infact your little slice of life personal storey sounds like complete bullshit. and dont even try to tell me that i must then be working some shit job, im actually an electrictian. my father is a super-intendant for a large construction company and my mom is in a high management position working at the san francisco airport. my father lost his savings when his company lost all its work, my mom luckily is still working, i however am also temporarily laid off. the irresponsible spending idea is *PROPAGANDA* am i aloud to say that word on this forum?
~fact "The average debt per UK household is around £7,000, excluding mortgages. Politicians want us to believe this is due to irresponsible spendthrifts abusing easy credit, but according to recent research at least one in five people in Britain resorts to debt to cover basic living costs."
~fact "Spending on credit has increased by 76% since 1983. Part of this increase is due to highly seductive, but often misleading, credit card advertising. According to the Office of Fair Trading, one in five credit card ads breaks the law – usually involving misleading information on interest charges."
Too the rest of you,
the whole business of journalism is just that... a business. this article is a sham... are we really supposed to think that this analogy is any where near accurate? yes... we're *supposed* to. however if the editors of this magazine and our dear writer did they would be even more foolish than the rest of us who follow along. read my above comment, does that seem right? its called satire.. charging your kids interest? someone pinch me, really?
"~fact "The average debt per UK household is around £7,000, excluding mortgages."
... But to get that average the statistic rolls-in all the UK households who DON'T have a debt as well as the ones who do (excluding mortgage).
That pretty much makes the statistic a pointless one, apart from pointing out that some folk are dumb enough to borrow themselves into a hole.
WHOA! Back when credit cards were something new, those higher (read "exorbitant") interest rates were justified as offsetting the cost of the inevitable delinquencies among high-risk borrowers. That's what made revolving credit free for those who do pay on time. So why wasn't it enough?