If you missed it, you need to go watch this Frontline last night on the history of credit card use in the United States.
My libertarian instincts eschew any regulation whatsoever, but it this show and my own personal experiences with credit card companies (inexplicably having my APR jump from 9.9% to 24.9%, when I have not been late or over my limit or anything) leads me to believe that some severe regulation needs to take place. The interest rates being charged in many cases are akin to loan-sharking, and it needs to be stopped.
I often villify Senator Chris Dodd, but he is right on this issue, and has repeatedly sponsored legislation (s. 2755) calling for modest reforms that should be embraced. I often wonder why the Democrats, instead of Quixotic attacks on the President and Republicans on issues they are wrong on don’t rally around issues in which they are right about- like this. It seems like the Democrats think the sole responsibility of the opposition party is to oppose- whether it makes sense or not. Why not offer an alternative with an alternative agenda?
What is more likely to get Democrats elected? Pissing all over the elections held in Iraq, or promoting something that would resonate with voters, like reform of the credit-card industry?
At any rate, it would be nice if the blog world would adopt this issue and push it to the front of the domestic agenda. If all of us start talking about it, linking about it, it will soon catch the agenda setters- mainly those in the MSM. A couple of months of us linking to horror stories and a couple of months of pressure from the people, the media, and the blogosphere might be enough to pressure even Republicans into doing something.
The way I see it, the main obstacle is House Republicans. This administration has shown its willingness to sign bills that it initially opposes, yet has popular support, and then declare victory. The Senate, likewise, would seem to be easier to influence. At any rate, it is worth a try. I would implore people to join me in this little crusade.
BTW- If you think this is a Republican/Democrat issue, you are wrong, and while the banks and credit card companies may not recognize it, it is in their long term interests as well. No one benefits when a third of the nation is defaulting on their credit card bills, declaring bankruptcy, and unwilling or unable to borrow for homes/cars because of bad credit ratings created by bad credit practices by credit card companies.
And, for what it matters, if you agreed with Bush’s rhetoric that no one should pay more than a third of their income to taxes, it seems to me you can also agree that no one should be charged interest rates 3-5 times the prime rate.
physics geek
I actually work in the financial services industry, and one CC company in particular. This offers me some particular insight as to how and why interest rates can change so drastically. These changes vary quite a bit from company to company, so YMMV. Anyway.
You think that a rate of 24.9% is akin to loan sharking? Since credit cards give the consumer unsecured debt(I’m ignoring securd CC’s right now), the issuing company uses its bean counters to determine what interest rate is likely to give a positive return overall for a particular population. The monetary returns from interest rates and monthly/yearly fees are used to offset the number of cards that go into default(charged off).
Let’s examine the 24.9% population. Assuming that this is the first card for someone, then the person receiving it tends to fall into one of two major categories:
1) No credit history, i.e. recent high school or college graduates. CC companies are taking a leap of faith, based on the usage and payment history from previous card holders in this group. Usually, the credit limits issued with these cards are low, from $500-$2000. Once reasonable payment history has been established, most companies reduce the APR while simultaneously increasing the credit limit. This helps increase customer satisfaction.
2) People with crappy credit histories. Delinquencies, past bankruptcies, collections, past charge offs. These are all indicators of risky customers. High interest rates and fees are used to balance the increased liklihood of customer charge offs.
Now, let’s address the reasons why a company might increase your interest rate. Usually, these are invariably rule breaks by the customer: late payments, delinquencies, etcetera. However, some companies( Citibank, most notably) will monitor not only your payment history with them, but rather your credit behavior overall. If you’ve been late to OTHER creditors, this can be a strong indicator that a customer is becoming more risky overall, and therfore more likely to charge off. Be advised that this was all spelled out to you in the initial disclosure of terms sent with your credit card. Most people do not read the fine print of 10+ pages. That’s an unfortunate reality. However, they have agreed to accept adverse actions taken against their account by accepting, signing and using the cards, insofar as it is disclosed in the terms. I know people that work in our legal and compliance department; they take those disclosure seriously.
Companies are required to justify any repricing actions that they take against your account. If you call in and ask why your APR skyrocketd from 9.9% to 24.9%, the phone rep should be able to tell you. As I mentioned, it may have nothing to do with your payment history with that particular financial institution, but may be based on your credit performance as a whole. You might not like it, but if you check your initial disclosure agreement, you will probably see the company giving itself that particular out.
I can already guess that some people will discount my views as those of a money grubbing capitalist simply because I work for a CC company. However, as an employee I have a pretty good handle on how and why adverse actions are assessed. Back when I worked for a bank, there were many fees that I disagreed with from a consumer standpoint. Sometimes from a moral standpoint, too, but that’s another issue entirely. However, in this case, I tend to side with the companies offering the unsecured loans. Just my opinion, of course, but it is an informed one.
John Cole
Just because something is in the initial disclosure does not make it an appropriate practice.
Kimmitt
Your link to Thomas isn’t working; could you post a bill number please?
physics geek
And who determines what is or is not the appropriate practice? The government? Since our DC types don’t seem to have any ability to manage their own finances, I’m strongly opposed to them regulating those of credit card companies. After all, the company is the one taking all of the risk by offering a credit line without any collateral. And no one’s forcing you to take the credit card. If you don’t the terms for a particular company, don’t take their card. Whining about the negative results to you when a company attempts to mitigate its own financial risk sounds like sour grapes. You may not think you’re a credit risk, but the issuer of your card has only credit bureau data to rely upon. If negative information exists there, blaming the card company for raising your rates seems pretty poor form. Just my opinion, though. I could be wrong.
Kimmitt
If you don’t the terms for a particular company, don’t take their card.
Two things:
1) It still makes sense to create some basic consumer protections, by outlawing practices which no one who wasn’t overwhelmed by fine print would possibly agree to.
2) Credit card companies are notorious for changing the terms of the contract after having lent you money.
3) This kind of thing is why I continue to place serious libertarians in the “cares more about extremely abstract principles than human beings” category.
John Cole
I am not whining. I am stating that credit card companies routinely engage in deceptive practices and charge fees, surcharges, and interest rates far in excess of what is necessary to ‘mitigate its own financial risk.’
Look at the data- when the revenue streams are based primarily on excessive late fees and other surcharges, as well as exorbitant interest rates, there is something wrong.
Again, no one is whining. I am asserting.
And the UDA is absurd.
Kimmitt
For the record, a quick search of the last Congress and “credit card” turns up a number of House bills with numerous Democratic (and some Republican) cosponsors that deal with variations on this theme. Dunno why the Senate doesn’t seem to have spent much time on it.
jeff
I understand that credit card companies bring some of these problems on themselves, not just in part because of some of the practices you mention, but because they often give cards to people who’s payment history simply doesn’t merit getting one.
HOWEVER, a much larger part of the problem is that there are a lot of people out there who get CC’s and are blithering fucking idiots with them and spend like there’s no tomorrow, apparently not realizing, or not caring, that eventually YOU HAVE TO PAY THE MONEY BACK.
I mean, I’m only 33 yrs old, so i don’t wanna come off sounding like a crotchedy old man, but when i was in college and a few years after college, i bartended. Back then, which is only a little more than ten years ago, when people went into a bar, they all threw some 20’s up and drank until their kitty was gone (hopefully leaving enough for a decent gratuity for my fine service).
Well, I was recently pulled out of bartending retirement the last two weeks because the place is in Philly and they needed extra people to work during the Eagles games and EVERYBODY seems to run tabs these days.
Granted, there are check/debit cards where even if you use one, you’re not spending what you don’t have as it comes right out of your account, and i’m some people just don’t like to carry cash, especially in a major city, and will pay their balance when they get there bill, but at the same time, I’m sure many, many of them were just using their credit card as going out funds.
If you don’t have money and can’t go out unless you have to charge it, don’t go out.
Terry
John, given that you appear to have found a soulmate on this issue in Kimmitt, you may want to reevaluate your basic position.
Farix
Credit Cards have become one of by biggest peat peeves next to most businesses only accepting a street address for a physical address before they will ship anything, even via the USPS.
While I agree that people who are financially irresponsible should avoid credit cards, our current economy makes that extremely difficult. In the past, all one really needed was a check and bank account to back it up. But I’m running into problems with many business accepting check without having to show a credit card along with your drivers licensee as “proof” of identify. And when it comes to mail order, well you can pretty much forget about it.
Some places are starting to improve things. Amazon.com will now accept checks or money orders, but it takes over a month before they will ship your order out to you, compared to just days if you use a credit card. And while Dell would accept a cashier’s check–though I had to personally call a sales agent beforehand, they still tried to put a lot of pressure on me to use a credit card instead.
CadillaqJaq
A couple of areas not mentioned before, maybe just one… phoney or stolen credit cards and their cost to the CC companies, though insured, may come back and bite you in the ass via those heavy interest rates.
Last month I needed some instant cash early one morning and used my Visa at my credit union’s ATM withdrawing $200.00, Later, when I rec’d my CC bill, I discovered I’d paid $10.00 for the privilege. Never again.
Bryan C
Yep, I agree. There needs to be some credit card reform, coupled with some basic education financial planning.
I know better and it still bit me. I’m 33 years old, and after a decade of paying off balances in full, I’m now carrying some credit card debt for the first time. It’s a one-time event (marriage and honeymoon expenses) and it’s hardly staggering, but it still makes it hard for me to sleep at night. I’ve stopped using my credit cards for all but a handful of necessary purchases. Anything else has to go on the debit card and must be covered directly from my checking account. It keeps me responsible.
Jon Henke
It’s an (initially) appealing position to take, John, but it’s economically illiterate. And desctructive. What you call inappropriate is what other people call freedom to set their own prices.
And you are, after all, free to go to another company. Would you advocate price controls in other industries? Maybe blogads are getting out of hand — ha! — and we need to restrict the prices charged? Maybe it’s time for another bout of wage and gas price controls?
Risk is just another commodity to be traded, and as long as there’s a free market, it will coordinate nicely.
Here’s an old post somewhat along those lines.
As the Angry Economist put it:
“A week ago, Elliot Spitzer [said] he was saving New Yorkers from being able to borrow money. He didn’t put it that way, but I do. He thinks that he’s saving New Yorkers from high interest rate (payday) loans.
I don’t think Elliot understands interest. There is a competitive market for loaning money to people with no capital. It is a very competitive market, because the product being rented is absolutely identical. You don’t have to take the money to the shop to have a mechanic examine it for defects. You know that $500 at 150% interest is cheaper than $500 at 200%.
In a competitive market, holders of capital wish to earn a fair rate of interest on it. Ahhhh, but what is “fair”? Consumers decide what is fair. A business makes an offer, another business makes another offer, and yet another another. The consumer chooses the offer that is best for them. This keeps the businesses honest and fair. Businesses that aren’t honest and fair are competed out of business.
Or, rather, there would be a competitive market, except that New York State chooses to interfere in it. New York State caps the interest rate for payday loans to 16% per annum. This doesn’t make the market go away, it just sends the market over to the Mafia. ….
The nature of interest is such that you cannot dictate the value of it. If you try to cap interest rates, you can only have two effects: people who need money won’t get it, or they’ll get it illegally. Either way, no positive effect is created from this law.”
Cock Hudson
The “nature” of credit cards has been well-documented since the early 1960s (Hillel Black wrote a book on it, I believe). This is old news, much like “smoking kills!” as a revelation in the late 1990s.
Being lazy-faire regarding credit cards is the American way. You have a choice… However, perhaps there should be a law that credit card companiess have to turn down applicants who are a) under 21, b) have bad credit histories already.
Dr. Weevil
I don’t know that I agree with JC’s solution, but the problem is worse than others on this thread seem to realize. About five years ago I had a Visa with a bank that simply lied and pretended that on-time payments were late, so they could charge $28 each time.
Maybe reading the small print would have told me that they had no grace period, and it certainly told me that my 1.9% introductory rate would go up to 25.9% if I missed a payment. What I did not know, and could not have known, is that they would keep payments lying around in their mailroom long enough to make them late. How do I know this? Whenever I sent a payment 4 days before it was due, it took 5 to get there. If I sent it 5 days before, it took 6. If I sent it 7 days before, it took 8. But if I sent it registered mail (or maybe it’s certified, I get them mixed up) with delivery confirmation, I could send it 3 days before it was due and it always got there on time. Registered mail and return receipts are not special delivery. They do not speed up the arrival of a piece of mail. All they do is provide proof of when it actually arrives at its destination. My payments were obviously arriving on time, but were left lying around unopened and supposedly unreceived until they were “late”, unless I had evidence to prove it.
The bastards who set up this system, and the other bastards who do the work, should all be in jail for theft. Perhaps some day one of them will have a crisis of conscience and blow the whistle on the others.
John Cole
Providian, Dr. Weevil?
S.W. Anderson
Once upon a time, before Jimmy Carter was president
caroline
All I have to say is when these idiots are sending out preapproved credit apps to my 12 year old son, something needs to be done!
Aaron
If you don’t like the rates you are given then don’t borrow money.
No one forces you to use it.
Sure, there needs to be some minor regulation on billing, how to describe interest rates, etc. to let the consumer be informed, but why can’t I charge what I want for my services?
ALSO LET’S KEEP IN MIND THAT IF SOME POOR SAP OVER BORROWS, HE IS NOT WHACKED LIKE BY A LOAN SHARK BUT GOES INTO BANKRUPTCY PROTECTION.
I even know someone who was planning to bilk the card companies, his student loans, etc. and declare bankruptcy…gee he could figure that fine print out pretty well.
Aaron
I bet there are laws regarding when they have to declare receipt of payment. I know for international wire funds that 72 hours is the max they can sit on it.
See, that’s a reasonable regulation that allows regularity and transparency to the consumer.
Of course another method of dealing with poor service (which could be done on purpose) is to CANCEL the card.
Let’s be clear: if you regulate credit card rates it’s the same as rent control in NYC – the consequence will be less credit offered.
John Cole
Sure, there needs to be some minor regulation on billing, how to describe interest rates, etc. to let the consumer be informed, but why can’t I charge what I want for my services?
Umm. The bill I am in favor of doesn’t even go that far. Do you guys read things before you oppose them, or just come into things with your mind made up?
And credit will not dry up. I am decrying interest rates 3-7 times the prime rate. I bet you will be able to find numerous credit card companies willing to lend for double+ the prime rate.
Farix
If you don’t like the rates you are given then don’t borrow money.
No one forces you to use it.
For now at least. But as I said before, it is becoming increasingly difficult not to have one to perform some basic financial transactions.
Let’s be clear: if you regulate credit card rates it’s the same as rent control in NYC – the consequence will be less credit offered.
In the long run, that may not be a bad thing. It will force us to be less dependent on credit and encourages savings and even bring prices down to contend with “sticker shock.” There is one possible downside, and that is that eliminating a credit based economy could put us into a recession.
John Cole
BTW- Congress in recent years has made it much MORE difficult to declare bankruptcy.
ON another note- I am not sure why people equate modest regulation of an out of control industry with me saying to hell with personal responsibility. I am merely against an industry designed to set people up for failure.
The facts speak for themselves- look at what the traditional revenue streams for credit card agencies used to be, and look at what they are now.
TJ Jackson
Mr. Cole:
With all due respect you have been badly routed by the Physics Geek. The ability to obtain credit isnb’t a right and having the government regulate rates makes little sense when it refuses to enforce or limit bankruptcies. Worse the government forces firms to issue risky loans which private enterprise must make or bear the tyrannts boot. Then of course I could offer you the services of my friend Guido if you think credit card firms are unreasonable.
ray
” it is becoming increasingly difficult not to have one to perform some basic financial transactions.”
So? What’s the problem? Get a credit card, use it to make on-line purchases, and send a check to the CC company the next day for the purchase amount. Isn’t this the same thing as buying it with a check?
S.W. Anderson
John Cole wrote: “ON another note- I am not sure why people equate modest regulation of an out of control industry with me saying to hell with personal responsibility.”
This is an all-too-common tactic: take the argument of someone you disagree with to the opposite, ridiculous extreme, so as to discredit your opponent and what he or she is saying.
I’ve had it used against me more than a few times and notice it’s SOP for many on the right, although I have to admit it’s not unknown for those on the left to do it as well.
Final note: In today’s economy, earning paychecks and access to credit are essential in ways that weren’t the case earlier in our history. The fundamental nature of our economy and the individual’s ability to meet basic needs has changed substantially.
To make a long story short, people are dependent in ways they weren’t when they could go out on the open frontier and make a life from their own labors. This dependence gives inordinate power to employers and lenders.
With the balancing factor of the open frontier gone, government is looked to keep things fair and reasonable for all.
Such notions, not love of government or regulation, are why some of us refuse to adopt the markets-uber-alles philosophy of the economic Darwinists on the far right.
Jon Henke
I’m sure you will find plenty of credit card companies willing to lend for 2+ times the prime rate.
But what about the portion of the credit-needing population which cannot be profitably extended credit for less than 3-7 times the prime rate? Where do you suppose they’ll turn?
And why do you think that–this time–price controls will work out so well? Because they’ve always worked out so well in the past?
Kimmitt
Enh, it’s not like the minimum wage is a Godzilla wreaking havoc on our economy. Some basic standards just make sense.
Farix
So? What’s the problem? Get a credit card, use it to make on-line purchases, and send a check to the CC company the next day for the purchase amount. Isn’t this the same thing as buying it with a check?
Ray, you apparently haven’t been reading very carefully, for that is exactly what I’m complaining about.
Aaron
Kimmitt,
The minimum wage might explain why you have undocumented immigrants working at below minimum wage.
I think regulation of credit cards to insure the public can discern real rates, and to have accountability is sensible. A rate cap might make sense to stop people from borrowing at unsafe levels.
By the same token, why not support SS accounts which force workers to save money and invest it?
If we can’t trust people to not borrow at stupid rates, why should n’t we also make them save money for their own good?
Kimmitt
The minimum wage might explain why you have undocumented immigrants working at below minimum wage.
I guarantee you, we’ll have undocumented immigrants working for shit wages whether or not we choose to protect our citizens from abusive working relationships.
By the same token, why not support SS accounts which force workers to save money and invest it?
Because then it wouldn’t be a “social insurance” program, it’d be a “forced investment” program, which is a rather different thing.
Aaron
“The minimum wage might explain why you have undocumented immigrants working at below minimum wage.”
I guarantee you, we’ll have undocumented immigrants working for shit wages whether or not we choose to protect our citizens from abusive working relationships.
–Uhhhh, you mean if there was no minimum wage, it wouldn’t matter anyways? Then why do we have the minimum wage?
Or are you saying there are just some hjobs that Americans won’t take.