Last month I talked about my displeasure with the predatory practices of the loathesome credit card industry, and I was promptly raked over the coals by my libertarian and arch conservative readers, who somehow find interest rates of 35-50% and obscene layers of fees wholly acceptable (to read some of the comments, you would thing they are vital or all credit would dry up). Apparently I did not learn my lesson, because I share Kevin Drum’s concerns:
I do not like the credit card industry. The revolting travesty of “universal default” is one reason. That they have become obscenely profitable by transforming themselves into little more than genteel loan sharks preying on the unfortunate is another. And the fact that despite all this they still insist that bankruptcy laws need to be tightened so they can squeeze another few dollars out of their already wretched clients is the final straw.
Kevin then links to this LA Times story, which is a must read.
People like Josephine McCarthy, for instance, a 71-year-old secretary at the Salem Baptist Church, less than a mile from where the Senate bill is being debating.
According to papers in her recent bankruptcy, McCarthy discovered at about the time of her husband’s death in 2003 that the couple had a $4,888 balance on a Providian Financial Corp. Visa card and another $2,020 balance on a Providian Mastercard.
Over the two years from 2002 until early 2004, when she filed for bankruptcy, McCarthy charged an additional $218 on the first card and made more than $3,000 in payments, the court papers show. But instead of her balance going down, finance charges
Jon Henke
Hey, John…I’m interested in buying one of your blogads. Unfortunately, your rates are unreasonably greedy, so you either need to lower your rates to something I find acceptable, or get rid of blogads altogether.
Because this voluntary exchange thing just isn’t working out. Not in my favor, anyway.
John Cole
The analogy is bad. A better analogy might be:
I give you a blogad for $1 a month. I then find out you were late paying your car insurance, so I jack the price of the blogad up to $100.00. You don;t have the $100.00 to pay when due, so I charge you another $35.00 for being lae, $50.00 for being over your limit, and then I charge you interest at 30%. Then, I ruin your credit rating, making it impossible to buy other blogads elsewhere. Then, when you owe about $1500 because of interest, late fees, overbalance fees, and whatever else I can cook up, you apply for bankruptcy. Even though I have received several hundred times what you initially owed me, I wantcongress to re-write the bankruptcy laws that have stood for DECADES so that I can continue to get obscene profits by syphoning off some of your future earnings.
That is more like it.
shark
McCarthy charged an additional $218 on the first card and made more than $3,000 in payments, the court papers show. But instead of her balance going down, finance charges
Birkel
I agree. This is *usury* or usurious.
TnTexas
I think shark raises some good questions and points. On the surface it appears that Mrs. McCarthy is having to deal with the consequences of some bad decisions she made – or rather not deal with them since she’s apparently hoping to get out of the situation entirely.
Jon Henke
Did I agree to continue the blogad after you’d jacked up my rate? Then what’s the problem? Did she continue her relationship with the credit card company?
It seems to me that her real problem is that she couldn’t be bothered to change her credit card company, or to cut up her old one, when the terms went up. Her apathy is hardly a reason to be angry at the credit card company.
TJ Jackson
Why was this woman using a credit card that charged so much? Was she a bad credit risk? Had she defaulted in the past?
TM Lutas
I have to say that I can see a pretty easy out. There are no barriers for any well-off non-profit to issuing credit cards with reasonable rates that generate a reasonable profit. If usury is generating unreasonable profits, it should be easy for competitive cards to steal away business from the usurers. It happens all the time at lower interest rates so what’s the reason that it fails in these cases?
There are two alternatives. First is that there was no failure and the interest rate was justified and second there’s some sort of phenomenon out there that conventional capitalist theory doesn’t account for. That’s the horse that you’re backing, John Cole. So what’s the cause of the capitalist failure?
Kimmitt
You imply a fully-educated consumer base with infinite time to research options — and credit reports which are correct in the first place. None of these are actually good assumptions, in my opinion.
praktike
Good for you, John. This is a really important issue, IMHO.
djw
Excellent post. Your response to the simple-minded libertarian rhetoric in the first comment captures what’s going on here nicely.
Manish
Did I agree to continue the blogad after you’d jacked up my rate? Then what’s the problem? Did she continue her relationship with the credit card company?
You might not have continued running a blogad, but the charges were still there and you had to pay them off and if you couldn’t pay it off immediately, you would be hit with fees and sky-high interest rates such that you would have difficultly ever paying down the blogad and your balance would keep increasing.
It seems to me that her real problem is that she couldn’t be bothered to change her credit card company, or to cut up her old one, when the terms went up.
Cutting up a credit card doesn’t absolve you of the debt. The story notes that she charge a very small amount to the card, paid a large amount and yet her balance increased due to fees and high interest rates.
The Zero Boss
John – I’m a self-styled libertarian Republican. I’m also someone who’s just getting out from under a sum-prime credit score, and I share your disdain of the credit industry. Most businesses – power company, cable company, etc. – will charge a late fee if you miss your payment, but that’s typically 3-5% of the total balance – a reasonable penalty. For some reason, only credit card companies can get away with slapping $70 or more in fees due to late payments and overlimit charges. And remember, folks, those fees generate compound interest. If you missed a $60 payment because you’re financially strapped, what hope in hell do you have of making next month’s $130 payment? Miss that, however, and it’s another $70 in late and overlimit fees. Miss just one payment, and it can be impossible to escape this bear trap.
With a scheme like this, why should the banks encourage you to pay down your balance? If you default, they’ll sell your account to a collection agency for pennies on the dollar, mark it as a “charge-off” on your credit report, and claim the discharged debt as a tax deduction at year’s end. (And I’ll bet dollars to donuts that each bank has an algorithm that tells them how many sub-prime customers they can treat this way and still pull down a handsome profit.)
Why don’t consumers just “get another credit card”? By the time you realize you’re in deep trouble, no other bank will take you on – unless it’s for even worse terms than before. One particularly noxious company, First Premier Bank, offers a great 9.9% APR on its card…which you can enjoy once you pay off the $250+ in fees they charge for granting you credit in the first place. These are the only type of deals available to sub-prime borrowers, some of whom latch on to them out of desparation.
Should consumers be held responsible for their credit mistakes? Absolutely. But once someone wakes up one day and realizes what a mess they’re in, the banks should make it possible for them to get out from under the weight and restore their credit. And that’s not happening.
Eddie
The answer is to not use Credit cards in the first place. If you play with snakes eventually you are going to get bit. If you develop a $4,000 revolving balance on a Credit card that means that you are spending more than you take in and I don
John Thacker
Of course, the easier people can declare bankruptcy, the higher the rates go. The credit card companies always recover their risk through rates. No matter what happens, they win.
So making it harder to file for bankruptcy will, in the end, lower rates.
Easy bankruptcy rules help those that fall into bankruptcy (whether through bad luck or anything). But they hurt people who will pay the money back by raising rates, or, especially in the case of the poor, making it impossible to borrow at all.
Armchair Genius
I completely agree with your post. Credit card companies are not only evil in their practices, they are dangerous for the health and well-being of the US (and by implication, the World) economies.
The one argument for credit card companies is personal responsiblity. If you can’t afford it don’t buy it. 2 things: (1) doesn’t this means all credit cards should be outlawed, since there is no point for them if people shouldn’t buy what they cannot afford (debit cards can be used instead), and (2) perhaps the credit card companies should take personal responsibility and not extend credit to people who cannot afford it? Or is this a do as I say, not as I do thing?
Mark Marshall
Me and all the guys down at the Rent-To-Own all agree that credit cards are for suckers.
Fargus...
The argument of “Don’t use credit cards,” is all well and good, but my mother, with an outstanding credit score, was penalized when she canceled some credit cards that she didn’t need. She canceled them because there was no reason to have them if she wasn’t using them, but she later found out that her credit score was at least partially related to the amount of available credit she had on hand. Decreasing that amount lowered her score, counterintuitively.
Does that make sense?
John Thacker
Armchair Genius–
Well, it’s all well and good to say that they should simply “not extend credit to people who cannot afford it.” Unfortunately, people want credit. And for people who use it wisely, it can help them invest in improvements and improve their financial situation.
Simply not extending credit to the poor would prevent many of them (who would be able to pay it back) from improving their lives. It’s also likely to force people to use pawn shops, loan sharks, Rent-to-Own businesses, payroll check cashing services, and other forms of loans that charge even higher interest than credit cards.
Credit card companies are greedy, and never lose money. If you believe that, though, you should realize that it means they’ll always raise rates in order to cover the people who declare bankruptcy and recover the risk, or else make it harder for the poor to get credit in order to reduce their risk. Except for the people already trapped in debt which they can’t afford (perhaps they should be grandfathered in?), any change won’t affect the profit rate of the credit card companies. Instead, making it difficult to declare bankruptcy lowers rates and increases availability of credit, thus helping the poor who would be able to pay it back.
There are always tradeoffs. But I snicker hilariously yet sadly at the people who complain about high interest rates yet support easy bankruptcy conditions that drive up interest rates.
Abby Vigneron
When my credit card was stolen, I reported it right away.
I also looked online and saw that there were several charges made.
American Express would not let me dispute the charges until they were actually billed. Then they charged me late fees when I refused to pay for the disputed charges.
david yen
When interest rates in general went down, most credit card interest rates did not. So what reason is there to think that if it is harder to discharge credit card debt in bankruptcy, that will be passed on to credit card users?
slickdpdx
Hey all you free marketeers, consider this. Credit card company extended loans under current bankruptcy rules. Regarding pre-existing debts, change of bankruptcy rules=unnegotiated windfall to credit card company via the legislature.
Ab_Normal
Fargus, the same thing happened to my mother. She asked me to read some auto insurance paperwork for her because her insurance rate had gone up. As far as we could tell, it was because she didn’t have ENOUGH available credit, because she has only two cards and pays them every month. (She’s very money savvy; I only wish to be as good as she is someday.)
Matthew Ryan
“She asked me to read some auto insurance paperwork for her because her insurance rate had gone up. As far as we could tell, it was because she didn’t have ENOUGH available credit”
Huh? What does a credit score have to do with insurance? Why would an insurance company even look at a credit score?
Gonzo
Guys,
I’m a lawyer. I make good money. But I’m from a blue collar background and I relied heavily on credit cards to get me through. I could borrow from them when I had no collateral to secure a loan from anyone else. That was worth a lot to me, even nearly usurious rates.
The bankruptcy reform needs to pass if only to deal with an issue evident with my ex-wife’s new boyfriend. He graduated vet school, accepted lucrative offers paying good money, and in the six months before those positions began, after which he would clearly have had the capacity to pay his obligations, he filed bankruptcy. Who was left holding the bag: His plumber. His landlord. His parents. His doctor. AND his credit card companies.
My ex wife confided in me that she finds the “glibness” with which he talks about his “free ride” through vet school to be unseemly. She never did have good taste, I guess.
Tom Blumer
To Matthew Ryan:
To oversimplify, the insurance companies unfortunately look at credit scores because they think a low score is a good predictor that you will get in accidents and/or torch your house. I don’t think they should be allowed to do this, but in most states they are.
There is an “auto insurance score” and a “home insurance score.” In each case, the score gives roughly equal weight to claims history and credit history.
Choicepoint, the company in the news because it has had people’s personal information stolen from it twice in the past three years (the latest involved 145,000 people), is the main provider of these “insurance scores.” How comforting.
Aaron
http://www.economist.com/displaystory.cfm?story_id=3672805
“All this is easier to describe than to do, especially when the economy slows. After the bursting of the technology bubble in 2000, several sub-prime credit-card providers failed. According to the Federal Deposit Insurance Corporation, an American bank regulator, in December 2000 there were 156 lenders specialising in the sub-prime market (including mortgage lenders and car-loan companies as well as credit-card issuers). Now there are only around 100, of which nine issue credit cards. Survivors such as Metris and Providian, two of the bigger sub-prime card companies, have become choosier about their customers’ credit histories.”
So, I assume you guys would all be for subsidizing these poor companies that supposedly make so much money (predatory) from high interest rates. I mean, they are going bankfrupt and closing down due to their evil, greedy borrowers who end up not paying what they owe.
Read the whole article.
LOL.
Aaron
Now, I am all for regulation of credit cards to make sure the terms are very clear and comparable, e.g. unit pricing in supermarkets.
Finally, perhaps there will be a market solution where a smart company offers “transparent” credit cards…i.e. no hidden terms, etc., much as car selling now has “no pressure, one price” system.
One more suggestion: require the credit card companies to print using larger typeface when they make changes!
Aaron
http://www.islamonline.net/English/News/2002-07/25/article06.shtml
another solution.
Bob
:The answer is to not use Credit cards in the first place.”
Sadly, that doesn’t work. You’re required to provide a credit card (NOT an ATM/check card) when renting certainl U-Haul equipment. Bad or insufficient credit can prevent you from getting an apartment or a job. Low FICO score? Scratch that lowered apartment deposit.
I’ve been trying to get along with just cash for many years now and I run into roadblocks all the time. Ever get asked to provide a credit card as *ID* at anyplace?!
Credit is an evil game that we all seem forced into, unfortunately.
gs
The Loan Shark Protection and Profit Enhancement Act of 2005 is outrageous. You nailed it: the electorate will snap at some point.
I grant that some borrowers game and abuse the system, but what about the behavior of the credit card companies? Did anything in this ‘consumer protection’ measure restrict predatory and deceptive business practices? If the New York Times can be trusted (‘Bankruptcy Bill…Victory for Bush’), the only consumers who were protected are high-net-worth people who can shelter assets in trust funds. ‘Go to it, sharks; just don’t bite the fat cats…’
Apart from the prima facie injustice, something like this could be a political tipping point. If indeed most consumer bankruptcies are in the red states, it shouldn’t be too hard for the Democrats to pry a couple loose in 2008, especially if the economy is weak. Note that one Senator H.R. Clinton, whose spouse pocket-vetoed a similar bankruptcy measure, voted against cloture on the bill.
Aaron
I’ll bet we can find several sob stories about spouses who gambled away their money at casinos or bought thousands of dollars of lottery tickets.
Both of the industries are regulated and it still happens! Why? (Hmmmmmm, maybe we should have more math and econ classes.)
Again, I think the best solution is simple, transparent regulation of billing procedures and not some medieval Christian thinking on the sin of usury.
And keep in mind that “small” part of the population that games the system costs the average credit card user US$ 550 a year (IIRC.)
Bob’s point could be valid as well…but I imagine if you have a decent record at a bank they can offer a basic card which you then simply NEVER use.
Dan S.
“Bob’s point could be valid as well…but I imagine if you have a decent record at a bank they can offer a basic card which you then simply NEVER use.”
But that just lands you back into the “insufficient credit” hole. Along with car insurance, U-Haul rentals, and getting an apartment, just *try* buying a house with a nonexistent credit history! Mortage, shmortage.
To some degree it’s entirely rational – this way you’ve proven that you can pay off debts. However, it also enshrines indebtedness as standard operating procedure, undermining personally held moral/practical attitudes that might protect those better off not taking such risks.
Aaron
Dan,
I rarely use credit cards, but I have an excellent credit rating. (Wait, I do use them buying on-line.)
The trick is to use them once in while, even though you could pay cash…then pay it back over three months. Where did I learn this? Home Economics class in high school. It won’t kill you to have aa US$ 500 limit card. You can request a lower limit, you know.
This debate has been very educational, though. I live overseas and I just caught a new sneaky 3% transaction fee for foreign currency purchases which would affect me – I mean that could hurt big for airline tickets, etc. But I’ll simply use my local card instead.
Again, I’m all for regulation that makes fees, charges, etc. transparent and somewhat uniform so people can compare easily and not be “duped.” Having some “maximum interest rate” would only result in less legal sub-prime lending.
Jacob
I have an excellent credit rating and have managed to leverage a good deal of my past financial risks into cards. Granted, one doesn’t always know about good credit decisions and until the internet made these kinds of materials available, it was hard for several years to find sound advice on dealing with money unless you had a lot of it to begin with.
However, I have had two cards increase their APRs steadily over the past several years. I have since been working to transfer balances. Thankfully, I have enough open credit to be able to shuffle the deck. However, at one point I had brought all of my debt under one card, bringing me within $800 of my limit. The credit card company raised my APR from 12.99% to 18.99% in one month without any late fees or penalties. Afterwards, it raised over the next 2 months to 24.99. Finally it reach 27.49% and at that point I called them and asked why by APR had risen so high. I was told that there was no lower APR available. I subsequently transferred out of that card, but considering that I had made consistent payments for several years, that same payment went from losing around $48 to finances charges to become so high that my monthly finance charges were MORE than the same payment amount.
The fact that credit card companies can offer low rates and then jack them up indiscriminately is the true crime. I was lucky enough to be able to reshuffle and currently have taken advantage of several fixed-APR options, but for an elderly person or someone who does not have that kind of credit possibilities – they are stuck for life.