Would Credit Restrictions Hurt Low Income Borrowers?
Economists often claim that they would be glad to help poorer families, but that such efforts would either be a waste or would actually make things worse. In the area of credit regulation, for example, the constant pitch from some academics (and echoed by the banking lobbyists) is that any limits regulating credit cards will result in driving the country's most vulnerable citizens to far more dangerous lenders. The theory, called the substitution hypothesis, has been in vogue for two decades, providing intellectual cover for lobbyists' efforts to checkmate any serious legislative effort to rein in predatory lending practices.
The theory sounds plausible, but a little evidence is an amazing thing. Researcher Angela Littwn has a terrific new piece directly challenging the conventional wisdom regarding the substitution hypothesis. She shows, for example, that those without credit cards simply have less total debt than those with credit cards--not that they take on "worse" forms of credit if they don't use credit cards. But the really unexpected zinger in Angie's paper is that, according to the low-income families she studied, there were no credit options worse than credit cards. In other words, these struggling families think credit cards are as bad as it gets.
Options like pawn shops and rent-to-own, which sound terrible to my middle-class ears, were rated on par with credit cards. Direct borrowing from retailers was rated much higher. According to the actual experiences of the people who lived with such credit, credit cards got low ratings because they were seen as much more dangerous (no real limits, escalating interest rates, hidden fees) than pawn shops and rent-to-own stores. To be fair, Angie's study came from residents of a state that has outlawed payday lending, so there still might be a lower-than-low rating if the payday folks had been in the mix.
If the substitution hypothesis is wrong, and if the main response to limits on credit is that people wouldn't have so much debt, then what happens in a true emergency? Angie asked these low-income families what they have done or would do if they didn't have access to credit cards or payday lenders and they really, really needed money? The families in the study gave a resourceful answer: borrow from friends and family. In fact, respondents gave the friends-and-family approach a high rating as a source of credit. Low cost, low risk, but enough interpersonal pain to make them not to use it unless the need was high.
Angie's study has a small N (these are very expensive data to gather), and, as noted, it is limited to a state with no payday lending, so she is quite careful to call her findings "preliminary." But her work has broken open some new lines of inquiry. Could some kinds of restrictions work? The automatic no was based on a substitution hypothesis that may not be accurate. Perhaps it is time to do some new thinking--and some more research.
I don't think restrictions will help. Those who are determinded to borrow don't care. If they want a car, money, whatever, all they care about is if the monthly payment is low and something they can handle.
Someone I love dearly was warned about predatory lenders. I gave him a great book about predatory lenders and also your book All Your Worth. He told me he read them and got a lot out of them. I think now it all went in one ear and out the other. He is in a trap with some of the worse CC co's imaginable.
I wish I could save him and others from
their dumb mistakes, but some people just need to suffer the pain and stress of debt until they decide to stop dealing with predators!
And whether , when it comes to dealing with those who are struggling, they are all the same...out to gouge those who they can!
Bonnie
http://pupart.1hwy.com/
September 16, 2007 10:06 AM | Reply | Permalink
Why wouldn’t restrictions help?
The predatory lending that your friend succumbed to would be made illegal. Worse case your friend would not have had access to any credit cards. Is that bad?
Aren’t government regulations really designed to help people like your friend who are unable to make decisions in their own best interest.
September 16, 2007 10:41 AM | Reply | Permalink
The New York Times regional section had a piece yesterday with good anecdotals from my home borough of the Bronx, which was interesting in that it almost describes a fully alternate financial system, where one buys jewelry which serves as rainy day funds as it can be pawned:
"Cash to Get By Is Still Pawnshop’s Stock in Trade"
By Manny Fernandez
I do myself see evidence of the emphasis on jewelry as something really important in many areas of the Bronx, less just body decoration, more "diamonds are a girl or guy's best friend."
The systemic attitude described in the article reminded me of how others have come to think of the purchase of a home mostly as equity that can be borrowed against, with other benefits secondary. The key, of course, is buying smart enough to be as near resale value as possible.
Some of the anecdotals in the article seem to relate to your point about not trusting credit cards as it describes personal customer relationships with the pawnbroker, i.e., someone you know that you can deal with and trust.
The article notes that NY regulates the pawn shops more strongly than some other localities.
Don't get me wrong, I am not promoting this as "wise," I am saying that there seems to be a lot of interesting similarities at work to that of other systems.
September 16, 2007 10:45 AM | Reply | Permalink
If they would be made illegal that would be great. I am all for that!
Bonnie
http://pupart.1hwy.com/
September 16, 2007 12:06 PM | Reply | Permalink
I think that was the point of Wsrren's post.
It would really help if you would read and think a bit before commenting.
September 16, 2007 12:13 PM | Reply | Permalink
You seem to have a problem with a lot of peoples posts.
I don't believe you are the moderator of this forum.
If the one in charge wants to delete my note then fine. It is noe of YOUR business!
I think your only purpose in writing is usually to try and put someone down. Says more about you than it does about me!
Bonnie
http://pupart.1hwy.com/
September 16, 2007 2:08 PM | Reply | Permalink
I was merely suggesting a way for you to avoid looking stupid.
September 16, 2007 2:42 PM | Reply | Permalink
so the metric is 'perception'???
i fail to see how that would open any new lines of inquiry let alone how that makes any reasonable distinction between what is predatory on the part of the lender and what is simply unwise (or uneducated) on the part of the borrower.
does the 'survey' really conclude that credit cards are perceived as worse than illegal loan-sharking?? or does the survey only include existing legal, regulated lending options?
September 16, 2007 3:54 PM | Reply | Permalink
i'll tell you though, with the judgment lien act here in michigan (whereby default on supposedly 'unsecured' credit card debt can now be placed as a lien against real property holdings), credit cards may well be as predatory as it gets.
September 16, 2007 4:00 PM | Reply | Permalink
It is so hard to understand what is wrong with credit cards as a source of funds. After all they only charge 18 - 24% interest. Surely, there's nothing wrong with that is there? We all know that the Daddy Warbucks class uses such credit cards for all of their credit needs.
Seriously, there was a time when there were usury laws that actually prevented people from charging such interest rates. Of course, when banks wanted to make more money by issuing credit cards the usury laws were change to not apply to such forms of credit. Now, I believe those laws only apply if you loan cousin Joe $1000 and want him to pay you 10% interest. Obviously I'm not an economist, so the subtle points of interest rates are over my head.
Hoppy in Sacramento
September 16, 2007 4:44 PM | Reply | Permalink
Maybe I'm missing something, but I see this as apples and oranges.
People who use pawn shops and cash-to-payday loans (I have used both) are generally people who cannot get a credit card, not people who once had credit cards but lost them. (These people also lack the credit rating for retail accounts).
I do agree that begging friends and family is the route of last resort, but that is a very GOP-like scenario (charity beats the welfare state, etc).
In my experience, those without credit cards go to pawn shops and cash-to-payday. When that runs out, they go to family and friends. When that runs out, they turn to crime- either by defaulting on debts, abusing government programs, or downright stealing.
Again, this is a bit apples and oranges, but what it boils down to is when people need to feed their family, they will try to get the money by any means necessary.
Capping interest rates would help these people get by, but do not for a second believe that denying them credit will somehow make them more fiscally solvent.
September 16, 2007 8:45 PM | Reply | Permalink
Ken D.
What lenders exist that could be the beneficiaries of such a massive shift, and that are "more dangerous" than payday lenders and the worst credit cards? Does anyone imagine that violent underworld loan sharks exist, or would appear and thrive, in such mass quantities? If not that, who else? I admit to being unfamiliar with this literature, but it doesn't sound like I am missing much.
September 16, 2007 8:50 PM | Reply | Permalink
Ken D.
Whether this is a problem heavily depends on the state homestead exemption. Wisconsin has had such a lien law for decades, but but also protects the first $40,000 of homestead equity from such liens. That amount is not great, middle of the pack or lower nationally, but high enough that few credit card judgments are collected by that route. Even aside from this issue, however, there certainly are strong arguments that high-interest credit cards are predatory.
September 16, 2007 8:58 PM | Reply | Permalink
Hoppy, I agree. And more to the point, when credit becomes sparse, Uncle Joe can no longer afford to loan that $1000 to nephew Bill.
Uncle Joe has to pay more cash out of pocket for his purchases because he can no longer finance them. Nephew Bill is only coming to Uncle Joe because Nephew Bill cannot get a loan himself.
I'm not an economist either, but lower interest rates equals more money in the economy equals more money spent.
I should qualify that with the statement that I am not necessarily talking about the prime rate or discount rate, which is banks borrowong from the Fed and/or each other, but the interest rate the public actually sees (even though they are linked).
But I think you are on target with your post, and I disagree with the author's point that denying credit card access would not lead consumers to more shady lenders. It does and it will.
September 16, 2007 8:58 PM | Reply | Permalink
Point taken, Ken. But I would argue that these people do exist, although on a more benign basis.
Friends and family members can take advantage of their own, and do. Gambling, either illicit or via lotteries, would entice those down on their luck.
Again, I must qualify this by saying that credit card holders and those who use pawn shops and payday lending are generally two different subjects. But if we are, wrongly I think, throwing them into the same pool, this is my opinion.
September 16, 2007 9:05 PM | Reply | Permalink
I think the theory is that capping interest rates and making some other practices illegal would result in some number of people being denied credit cards who can now get them. The question is whether those people would turn to worse sources of money. Warren appears to be making the case that they would not.
September 16, 2007 9:20 PM | Reply | Permalink
Right. And my case is that they do and they would.
Also, my point is that pawn shop and payday lender customers are generally people who do not have credit cards to begin with, making this analogy apples and oranges.
September 16, 2007 10:05 PM | Reply | Permalink
Nobody asked for your suggestion.
You have THREE no 1 ratings on your post!
That means UNPRODUCTIVE!!!
Bonnie
http://pupart.1hwy.com/
September 17, 2007 8:36 AM | Reply | Permalink
I have compassion for dysfunctional, unproductive people, but if you reject my help, well, at least I tried.
September 17, 2007 8:45 AM | Reply | Permalink
jeez, would you two go get a room.
Reminds me of my 9 yr old granddaughter and her friend yesterday. did to, did not did to, did not, and f**king on and on and on. Mom did come and get them at 7:00 pm. none too soon.
Jack
September 17, 2007 10:41 AM | Reply | Permalink
I have compassion for you too!
Bonnie
http://pupart.1hwy.com/
September 17, 2007 12:13 PM | Reply | Permalink
I have compassion for you too!
You don't know me and you have no idea what I have accomplished in my 60 years of living on this earth.
I didn't ask for your help and I doubt many others ask either.
You are a pitiful soul!
Bonnie
http://pupart.1hwy.com/
September 17, 2007 12:26 PM | Reply | Permalink
but, maybe, without payday lenders, people wouldn't go broke paying back the money they borrowed and be a good candidate for a credit card. it's the "rich get richer" and "poor get poorer" argument.
To boldly go...
September 17, 2007 4:52 PM | Reply | Permalink
It does and it will.
it can but not everyone makes bad decisions. .i.e. perhaps the lack of loan access encourages people to solve their problems w/o money. for example, I ride my bicycle 10 miles (round trip) to work instead of taking a bus or car and, in return, I get to my destination faster, it's free and I get in shape too! For people obsessed with cars, they don't understand the positives of going by bicycle and never will...
I also used to watch too much TV but, one day, I put my TV in the closet and never watched it again; however, I did get "index finger erections" for a while afterwards since I was used to "turning the TV on" when I woke up.
My interpretation of Ms. Warren's post was that some people change their habits, for the better, when credit isn't available...
slowly, but surely, I'm cutting down my internet access and switching over to exercise and reading and I'm down 70lbs in weight and my blood pressure and V02 Max readings are youthful again.
so the biggest problem I see with Ms. Warren's post is that it doesn't hint at how many people will get better at managing their money if credit is taken away.
some people go bankrupt for managing a lot of money poorly while others, who look poor, know how to stretch thier dollars and make them last.
To boldly go...
September 17, 2007 6:36 PM | Reply | Permalink
I love the argument by the credit card industry that if low-income people weren't forced to pay the exhorbitant VISA and MC interest rates "the country's most vulnerable citizens to far more dangerous lenders." That's rich! It really is!
Only a loan shark could make that argument with a straight face. How can you be any more dangerous as a lender than someone charging 18, 24, or 28 percent interest as the credit card thieves regularly do? It's astounding they can make such absurd statements and not be laughed out of the room. What really, is the difference between them and the "more dangerous lenders" they refer to? Are they talking about the difference between Mr. Potter of "It's a Wonderful Life" fame and Tony Soprano? Is it the difference between Elvira Gulch versus John Gotti? I guess the credit card execs want a big, enthusiastic "attaboy" for not sending someone around to break the legs of people who don't pay on time.
What happened to plain old common sense and decency in this nation's legislative and governmental bodies? Are they all up for sale now 24/7 and forever? Is there no boundary our spineless elected officials are unwilling to cross for the benefit of predatory wealth? Sure seems to be that way anymore.
With the Republican Party taken over by neo-fascists and the Democrats unable to remember what Democrats are supposed to do or how they act I'd say it's time people started raising some hell around here.
September 17, 2007 7:40 PM | Reply | Permalink
no amount of equity is exempted in michigan.
by exempting such a large amount of homestead equity, the wisconsin law seems narrowly crafted to address egregious credit card fraud/abuse.
the michigan law on the other hand allows credit card issuers to charge their high interest rates (which are typically much higher than interest rates on secured lines of credit, ostensibly because the credit cards are unsecured) but then allows the credit card issuers to make that unsecured debt secured debt ex post facto.
i don't have a problem with charging 20% on unsecured debt. lenders should be able to charge high rates when they take on a significant risk of not being able to collect if the borrower defaults. and consumers should be allowed to make informed decisions regarding their personal finances and debt accumulation even if those decisions wouldn't be considered advisable by you or i. in that scenario, the cost/value of risk is being calculated by a fair market. what i have problem with are policies (like the michigan judgment lien act) whereby the gov't significantly mitigates the risk for the lenders when the lenders are already being compensated for that risk in the form of such high interest rates in the first place.
September 18, 2007 9:34 AM | Reply | Permalink
Patriotism is the last resort of the scoundrel. The first resort of the rich is pretending to represent the best interests of the poor.
Seriously. Is this not the oldest trick in the book? The idea that credit card companies exist to help the poor should be presumptively dismissed as B.S. Still, it's kind of nice that someone did some research to debunk it one more time.
September 18, 2007 9:04 PM | Reply | Permalink
actually, "the idea that credit card companies exist to help the poor" is pretty easy to debunk: one need only point out that "the idea that credit card companies exist to help the poor" is merely a strawman that completely misrepresents any arguments that anyone actually makes.
September 19, 2007 8:20 AM | Reply | Permalink
The argument that lending to the poor for a profit is helping them is delusional. Lending to the poor should be without interest. Otherwise it isn't helping them at all. It only gets them in deeper financial trouble. So reducing the credit limits, is a step in the right direction. Reducing interest rates is a move in the right direction.
All lenders should be limited on interest rates, and before a borrower can take out a loan there should be some sound financial education about the dangers of borrowing. In the case of the poorly educated and the lower class, there should be alternate non-profit lending institutions and programs that make interest free loans and financial and small business education, as well as skill training, to help them become more productive. Lenders should be prohibited from lending to this crowd for profit, and for any other reason than to help them get ahead. No consumer loans or credit cards. This would go a long way toward addressing poverty.
Lending to the poor at high interest rates because of the risk creates more poverty in society and creates a windfall opportunity for predatory lenders to seize the assets of the poor and enslave them for life to a high interest debt obligation. This is a problem the new Bankruptcy Law is feeding and nourishing in our economy.
I truly believe more research will reveal these things to be true.
Jim Anderson
The Truth About Credit
Facebook Profile
Ministry WebsiteSeptember 19, 2007 3:34 PM | Reply | Permalink
THAT kind of 'help', people can do without. The 'con me' costs money, what you pay for rent, food, power, phone, fuel, and sundries, all costs money. 'Credit' is a shell game by which
you end up being held by the short hairies,
living life in a gilded cage perhaps, but a
cage nonetheless. If you really want to help 'the poor'(never did see anyone walking
around wearing a sign that said 'one of the poor'), hand them a pair of scissors with which
to snip up those credit cards, and maybe help em find a job instead. Cold hard cash to pay your bills with, not funny money...
September 19, 2007 6:37 PM | Reply | Permalink