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Credit

Nobody likes credit card companies. Never mind that they make our lives easier, by making our budgets more flexible and opening opportunities for financial control that our parents never dreamed of having, it's the politically correct thing to trash them. Even the executives of those companies have been acting like they were lower on the moral value meter than companies selling liquor, tobacco, porn, or political advertising. This is not to say that credit card companies and the banks behind them have all been saints and model citizens, but throwing all the blame on them is not merely unreasonable, but a poor plan for improving the future of credit.

Credit is all about risk. Let's say you have a buddy who wants you to loan him $50 until the next paycheck. If you do, you're granting him credit. It's not hard to understand that you will have different levels in mind. You might not mind giving money to your spouse and kids, you might agree to loan a buddy some money interest-free for a week or two, but outside that circle, you'd probably want something for your trouble, especially since the further away from center you get, the less you can trust that the borrower will pay you back quickly or in full ... and in some cases, at all.

That's why credit cards exist. You have the choice of carrying around a lot of cash, giving someone access to your bank account with a debit card or checking account, doing without because you don't have the money for what you want (and sometimes need), or you carry a card that will bill you later for your purchases. What's really sweet about credit cards is not only that you can buy all sorts of things with them, but that a credit card builds a history you can use to buy important things like a car or a house, and if you pay the balance in full each month it costs you only the annual fee to use the card. Credit cards build a reputation of financial responsibility, and they offer convenience and security that cash-alone cannot offer.

So why the hostility? Basically, human habits. We live in a society that often punishes success and forgives failures, and in some cases even protects failure by punishing those who would hold individuals to their commitments and the consequences of their decisions. A lot of people carry balances on their credit cards each month, and they resent having to pay the finance charges those cards require, even though in almost every case the individual was presented with the terms clearly and directly before they started using the card. Some folks pay their cards late, and resent the late fee they earn. The Obama Administration is playing on those immature attitudes, demanding the credit card companies be punished because people cannot manage to pay their bills in full or on time.

The problem for the credit card companies, is that the business model cuts both ways here. These companies chose to sign up people who in some cases were bad credit risks - I mean really, there are credit card companies which sign up people several times for the same card, without once collating the information to track the rising debt levels and default risk. Just stupid, and even more so to imagine that such people can be led to start practicing sound financial behavior just because they get into trouble with their cards. The profit model of credit card companies, after all, depends on people carrying a balance and paying finance charges. If everyone started paying all their bills on time and buying only what they could afford, the credit cards would not be able to operate as a going business. It's the same reason that the government doesn't really want people to stop smoking; it's bad for their bank accounts.

The Obama Administration does not really want to go too far the other way, though. If credit cards were punished for their usurious tactics to the degree that the President's rhetoric implies, many of the banks behind those cards would abandon the business altogether, as it would become a poor risk for their capital. Discretionary spending would plummet even more, as consumers' desire to save would be accompanied by a dearth of credit providers for those still eager to splurge. Finding a steady and significant source for consumer credit would become more difficult than getting Obama to say 'Bush was right'. It just would not happen.

So, enjoy the show but don't expect much to change. Because when it's all said and done, only you really care about your own financial health, so you'd better not trust it to a politician or a corporation.


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Comments (13)

People who want to nuke the... (Below threshold)
Oldflyer:

People who want to nuke the credit card industry are apparently too young to remember life before the cards.

I admit that those of us who pay our bills each month are benefiting from the actions of those who keep the credit companies flush with their interest payments. (The intelligent have always benefited from the actions of the stupid.)

No doubt there needs to be some reform. I would limit this to requiring applicants to contact the company, rather than letting CC companies send unsolicited offers to anyone with a mailing address.

Credit Card companies opera... (Below threshold)
1918:

Credit Card companies operating in a reasonable manner are not the issue, nor is the proper assessment of risk.

The issue, and why these companies have brought this on themselves, are the arbitrary rate increases on outstanding balances, the reduction payment cycles designed to increase late payments and fees and the overall aggressiveness in collecting fees.

Missing a payment for a week (or never missing one for that matter) does not justify a risk assessment that doubles rates on existing balances. It is all too clear that greed and not actuaries are what is driving rates.

If everyone started payi... (Below threshold)

If everyone started paying all their bills on time and buying only what they could afford, the credit cards would not be able to operate as a going business. Wrong, wrong, wrong. Even stipulating that Amex is not a 'credit' card company, their business model proves a card issuer can be profitable without extending credit. Not as profitable, perhaps, but still profitable. And to the extent that they lose one revenue stream, they'd just make it up elsewhere, like charging monthly fees for cards (like Amex).

arbitrary rate increases??? Wah, wah, wah. Did you forget you agreed to that risk when you signed up for the card? Or is it only supposed to work one way, you get to enjoy the benefits of low initial rates but don't have to pay a penalty when YOUR actions prove you to be less than no-risk credit? Make your payments on time - LIKE YOU'RE SUPPOSED TO DO - and you don't get socked with late fees and rate increases... pretty simple, at least for responsible adults.

And DJ, you better be nice ... (Below threshold)

And DJ, you better be nice to me or I'll report you as a cyber bully and send you off to prison....

s strum - "arbitrary ra... (Below threshold)
marc:

s strum - "arbitrary rate increases??? Wah, wah, wah. Did you forget you agreed to that risk when you signed up for the card?"

Actually you forgot some around here are in possession of just enough intellect to not take your bullshit at face value. ( and mind you, it doesn't take much)

They found that since the Credit Card Bill of Rights was first voted on in Congress last December, credit cards have been adopting some consumer-friendly practices, but that they're ignoring practices that make them a lot of money, according to Samir Kothari of Billshrink.com.

For example, one of the most powerful acts of the bill includes protection from arbitrary rate hikes. But no issuers are in compliance yet.
Thanks for playing steve. Don't forget to collect your parting gifts as you leave.

you dope, you're criticizin... (Below threshold)

you dope, you're criticizing card companies for not being in compliance with provisions of a bill that ISN'T YET A LAW! Why should they be.. especially if doing so negatively impacts their profitability?

And your intellect falls short in answering my point that the card companies are taking actions that cardholders agreed to when signing up. (hint: if those actions weren't part of the cardmember agreement (you know, all those papers you didn't bother reading?), the charges and rate increases wouldn't hold up if challenged in court)... which let's me repeat my point: you took the card, agreeing to let the card company raise your rates if you did something like pay late or suffer a decline in your overall credit rating... and now you're crying, wah, wah, wah. I've got as much sympathy for you as I do for all the people who bought houses they couldn't afford and are now complaining.

Try again. The bytes are free.

Who is Barry going to pick ... (Below threshold)
GarandFan:

Who is Barry going to pick on next? Funeral directors? Used car saleman? The world wonders. It's all about enemies of the people. Didn't someone else try this gambit..circa 1933?

ss - "you dope, you're ... (Below threshold)
marc:

ss - "you dope, you're criticizing card companies for not being in compliance with provisions of a bill that ISN'T YET A LAW!"

Never said it was the law asswipe. Guess you failed to read the first line of the blockquote that said "They found that since the Credit Card Bill of Rights was first voted on in Congress last December,"

So take your strawman and stuff it somewhere else.

As to your point, it's pointless, many companies have been caught raising rates that were never specifically spelled out, or implied in contracts.

Do your own research, I'm tired of force-feeding you dimbulbs.

No,you didn't say it was th... (Below threshold)

No,you didn't say it was the law, but neither did I say that you had. My point remains, and one that you, for all your bluster and profanity (your mom must be so proud of you), haven't rebutted: you've criticized companies for not complying with regulations that aren't law. that some companies have allegedly been caught violating the cardmember agreements is also irrelevant to whether a card issuer needs to or should comply with a law that isn't a law.

ss - "your mom must be ... (Below threshold)
marc:

ss - "your mom must be so proud of you"

First thing you've said correct in the entire thread, she was the Original Bitch, and taught me long ago not to suffer fools such as yourself and to call an idiot as they are.

"you've criticized companies for not complying with regulations that aren't law."

Nice try I criticized companies for doing the exact opposite of what you claim they haven't done. They have consistently jacked up rates without full knowledge of those that hold their cards.

Now, as my Proud Momma would say - bugger off!

Back to my original though... (Below threshold)
Oldflyer:

Back to my original thought. If there is anyone left in this country who is uninformed that running up credit card bills is like playing financial Russian roulette, they are too dumb to be let out of doors alone.

I have had a Visa with Bank... (Below threshold)
WildWillie:

I have had a Visa with Bank of America for years. My interest rate is very low. My wife and I are never late with a payment plus we pay it off completely most of the time. For that I maintained a low interest rate and a very generous line of credit.

BofA notified me that if I use my card after May 1st, I will have my interest rate changed to 10% on average. I am being penalized for their missmanagement and risky card holders. ww

WW, of course you are being... (Below threshold)
Oldflyer:

WW, of course you are being penalized for the actions of "risky" people. That is the nature of things. The only recourse is to limit your liability for the actions of others.

In case you haven't figured it out yet; you ain't seen nothing. Wait until Obama's bills come due for bailing out risky behavior and increasing his power over the economy (and you). Crdit card debt will be insignificant by comparison.

Funny, that as BofA and others are struggling to survive, you focus on the increased cost to you, but only if you choose to behave in a way to incur those costs, rather than focusing on all of the years of a very good deal you had and the great convenience that you enjoyed.

I love my credit cards. I buy things on line--airline tickets and such; I carry very little cash; I never carry my check book; I don't have to buy traveler's checks when I travel---and they cost me nothing, because I just pay the bills when they come due. My finances are just like before I had credit cards, except that I do have the convenience. Well, not entirely; because it is easy to buy things on impulse and I have to remind myself that the bill will come due shortly. But, for most adults that shouldn't be too hard.




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