Dual Income No Kids posted this video about ongoing legislation that would work to rein in credit card companies. You might think that because I manage a blog carnival on debt reduction that I'd be all for something like this. After all, it would help people get out of debt faster if there were more stringent rate caps in place, more restrictive user agreement leeways, and more limited effects of universal default, right?
Well, no, sorry, I'm not all for it. There are a few reasons:
- I'm selfish. I don't know any other way to say it. I pay my credit card bills on time, in full. I get free float. I even get a little bit of kickback in the form of a credit on my bill, just for using their money for free for a few weeks. It's a sweet deal for me. The credit card company loses money on me each and every month. Why are they able to do this? Because other credit card users are paying $35 late fees, $35 over-the-limit fees, and 28.99% APR. That, and they're keeping me on board just in case I run into trouble, and then I, too, will start paying $35 late fees, $35 over-the-limit fees, and 28.99% APR. If credit card companies are only allowed to charge 15% (say), and $10 late fees, my swag goes away. Maybe even my credit card will go away!
- The idea that consumers need to be protected doesn't really hold water. If the rules are complicated and hard to understand, so what? If someone signs an agreement with a credit card company, doesn't understand it, and does something in the agreement that causes his rates to go up to 28.99%, how on Earth is that the credit card company's fault? The fact that he didn't understand it doesn't mean a darn thing except that he was careless. Come on.
- The costs of the legislation will adversely affect people who carry balances, too. They will adversely affect everyone who carries a credit card, not just freeloaders like me. The highest-risk customers become unprofitable, as the effective APR they can charge no longer is enough to compensate them for the average default rate of said high-risk customer. So, they will be denied credit. Medium-risk customers, once able to transfer balances to another company, or once able to renegotiate their rates, will be less able to do so. Rate caps are a form of price control, which will raise the costs of credit for everyone.
Anyway, what's your take on this?
Like you, I am a freeloader – doing very well out of the cashback on my no-fee cards. I have NEVER paid a fee in over 20 years of card use.
The only real issue I have with the credit card companies is that they made their disclosres very difficult to read. I am a savvy consumer with a higher education and financial
-sector education. I have to read very carefully to know the rules, and I bet there are many people who couldn’t understand the disclosures no matter how hard they tried.
I suspect they did this on purpose.
On the other hand, there are way too many people right now who have the idea that they somehow DESERVE credit, loan forgiveness, etc.
The government is simply pandering to populism. This political action is irresponsible and will hurt America in the long term. (But it’s a great vote-getter today! Come to think of it, free money is always a great vote-getter.)
Thank you, thank you, thank you! Finally a voice of reason.
This bill will not help those that carry a $0 balance. In fact, credit card companies will soon start scaling back rewards programs even more than they have. Look at the Amex Blue Cash card… the 1.5% cash back is dropping to 1.25%.
1) You are wrong about your swag going away. They make money off merchant charges even if you never pay them a cent. Now some rebates may diminish, but they may under any circumstances.
2) The irony is this protects lenders by reducing the incentives to making bad loans, but who says they need it, until they come begging for government to save them.
3) Actual it reduces losses by reducing bad lending. The problem is bad lending is bad for everyone, not just the sucker paying 25% or the suckee collecting 25% until their mark goes belly up. Access to credit is no benefit when it leads to ruin. Denial of credit is no loss when compounded.
“The credit card company loses money on me each and every month.”
As Lord pointed out above, credit card companies make money every time you use their card by charging the merchants a fee.
I am glad that CC companies are being a little more selective about who they extend credit, its about time really. However, to say that their practices are acceptable is not being realistic. Changing due dates, manipulating credit lines (thus manipulating credit scores) are not really honorable practices.
These laws are being proposed because of ethics. Just because something is legal, does not make it ethical. I think we are forgetting that here. Just because a company can charge 6% to loan you this month, and 29% next month, because its in the 4 point type notice they send you, does not make it right.
Slavery was once legal in this country, did that make it right?
Jim Crow laws made discrimination legal in this country, but that was not right either and laws had to be put in place because left to their own devices, local govts would not do what was right.
I think the media is blowing a very small contingent of people way out of proportion, but to sit back and say you are not effected by it is not true.
You pay taxes to your local school even if you never have a child. I have read a lot of stuff about these bills, and I have not seen too much of people not being willing to pay what they owe, its just that when you borrowed 200 and you end up owing $3000 something is not right.
I guess I have too much compassion to agree with the above statements, maybe because I have actually been victimized by these credit companies myself. Just for the record, I am not advocating debt forgiveness here, just to be treated fairly.
Hey All,
This is James from Dual Income No Kids.
An adequate criteria for government intervention in the economy is to prevent harm.
Many of the practices of credit card companies are designed to “fee harvest” or “create situations of dependency” that is the fees and interest calculations are designed to keep the borrower in debt.
This is harm. Pure and simple. Its harming peoples ability to care for their children, its contributing to marital disharmony, and its harming peoples ability to achieve financial freedom.
Its is therefore well and duly appropriate for government to intervene to prevent this harm.
Respectfully, MBH, runs a very excellent blog, but in this case, I strongly disagree with him. This legislation cannot come soon enough or be strong enough.
It is long overdue.
-James Carl Hendrickson
Lord, DD: 1.9% + $0.35 isn’t a whole lot per transaction, and that comes from the merchant, not me. I get free use of the money for three weeks. They’re losing money on me.
Michele: I didn’t say that I wasn’t affected. We’ll all see the effects from this.
James: Thanks for stopping by! A few comments for you.
When you talk about “situations of dependency,” isn’t that what you _want_ with a business? Don’t you want your customers coming back for more of what you’re selling? I would.
As for your “harm” comment, there’s an easy way not to be harmed by CCs: don’t get one. Or if you get one, don’t charge anything on it. Or if you charge something on it, pay the bill, in full, by the due date. Any harm that comes to people’s marriage, their children, or their financial freedom is the result of them (a) carrying a balance, and (b) not paying their bills on time. It’s not the CC company’s job to be your mother. Its job is to fulfill financial transactions to merchants on behalf of customers, and to profit by doing so.
The problem with having strong legislation like this is that if you prevent too many people from failing, you also prevent a lot of people from succeeding. Forcing CC companies into situations where their most profitable customers are no longer as profitable raises everyone’s costs. Rates go up, limits go down, annual fees come back, rebates go away, to protect the people on the margin who are unable, or unwilling, to use their cards responsibly. Almost everyone’s standard of living takes a small hit when there are price controls. It’s unavoidable.
If the role of the government is to reduce harm, maybe we should force insurance companies to insure everybody, regardless of accident record, etc.
And no store should be allowed to increase the price of milk in case someone can’t afford it.
And of course we should have laws banning large vehicles that damage the environment, And McDonalds should not be allowed to supersize our fries – that’s harmful. etc., etc.
Letting the government role grow is a slippery slope to full-blown socialism.
Perhaps credit card companies should be forced to explain double-cycle billing in clear language, but I don’t think they should be prevented from selling products that use it.
The nanny state is growing in Europe and we should resist it in the US.
Hi MBH et al.,
Just wanted to respond back quickly.
Its not ethical, reasonable or appropriate for business to harm their customers. To argue that its okay for businesses to harm people is like saying its okay for people to kidnap others off the street and sell their organs – its an extreme example – but you can’t ethically concede the point. Otherwise, its moral cretinism.
Now, if an individual chooses to harm themselves thats a different question.
Regarding the importance of credit cards – you’re basically asking, don’t people really need them? Great question. Elizabeth Warren had a really excellent analysis a couple of years ago. In it she argued that the root cause of the need for credit cards was declining real wages and increasing real costs of housing and health insurance. Thus, consumers are in a sense, forced to used credit cards, simply because they can’t earn enough to make ends meet.
Also, the notion that people need a credit card for car rental, to buy a plane ticket, build up credit, etc etc – is absolute nonsense. A credit card is not needed. Maybe you need some form of electronic payment, but it doesn’t have to be a credit account.
Also, while I am writing, I think the banks have gotten entirely too big for their britches. I think they’ll do their absolute best to block reforms that are consumer friendly and instead pass protectionist legislation. Plus many credit card companies can charge effective interest rates that are in the range of 29% to 100%. Then their CEO’s get in front of congress and say that everything is okay and they aren’t harming anyone. The arrogance and degree of hypocrisy of big finance is stunning. Its Stunning and I think insulting to any reasonable sense of fair play. I sincerly hope the Obama adminstration takes big finance to the woodshed and gives them a sound regulatory beating. They certainly deserve it.
Interesting argument.
I agree with both James and MBH.
I think credit cards and the use of them are traps, yet I think any company has the right to sell to suckers.
It is not the responsibility of Govn’t to oversee that people do not get into debt. It is the individuals responsibility to not get into trouble on their own, and if they do, pay the price.
However, it is also a fact that a majority of credit card users “lose” at the credit card game, and a majority pay interest charges, get in deeper, and are hurtling toward disaster.
I think the solution is for people to wake up and pay attention, which likely won’t happen. Collectively, people are dumb. That is why credit cards exist in the first place.
If people stopped using them, they would go away on their own.
In fact, when the second wave of economic calamity hits next year…yes it is coming and no, the worst is not behind us…you will see mass exodus against unsecured debt payment.
The CC meltdown is next.
Some advice from Adam Smith:
The legal rate…ought not be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors [promoters of fraudulent schemes], who alone would be willing to give this high interest….A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.
When the legal rate of interest, on the contrary is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown in the hands in which it is most likely to be employed with advantage.
And I wouldn’t call 24% “interest” a year small at all, despite its being paid by the merchant. They don’t have the advantage of compounding it, but there are new purchases every month.
What do you say about those people that would get a pre-approved credit card in the mail and just max it out, regardless how able they were to pay it off? We have credit industry that tells people to “get the credit they deserve,” but, for the life of me, other than being alive, I don’t know why they deserve it. These morons charge up a storm and blame everyone but themselves for their financial woes.
SNL recently did a great skit called “Don’t Buy It If You Can’t Afford It” and it’s on YouTube somewhere.
I agree that it’s the individual’s responsibility to make sure s/he pays his debts(including credit card balances) on time so late fees can be avoided. If such people act so careless and miss paying on time, then it’s their fault, and the government should not have to come in to fix things up.
I have also been a free loader on these scumbag credit card companies. However, I’ve gone about it in an entirely different manner.
I had built up my credit rating to a very respectable number. Then was hit by hard personal and finacial problems. What did I do. Drew every possible dime out of every credit card account I had, and defaulted on all of them. Thanks for the money ass holes.
Also, while I am writing, I think the banks have gotten entirely too big for their britches. I think they’ll do their absolute best to block reforms that are consumer friendly and instead pass protectionist legislation. Plus many credit card companies can charge effective interest rates that are in the range of 29% to 100%. Then their CEO’s get in front of congress and say that everything is okay and they aren’t harming anyone. The arrogance and degree of hypocrisy of big finance is stunning. Its Stunning and I think insulting to any reasonable sense of fair play. I sincerly hope the Obama adminstration takes big finance to the woodshed and gives them a sound regulatory beating. They certainly deserve it.
+1
Having the government step in to \protect\ retarded money spenders only encourages retarded money spending. We act like living below our means is an impossibility, which in most people’s case it is because they think their means has to include $30-40k cars and huge houses without considering how they’re going to pay what they think they deserve.