Is the Credit Industry's Political Base Eroding?
Following up on Professor Warren's recent post, today's news includes even more hope that political winds are shifting in favor of the consumer. Today in Washington, Senate hearings included testimony from an Ohio man whose $3,200 credit card debt swelled to $10,700 through interest and fees. While executives of three major banks defended the practices of their industry, the Senate pushed back. My favorite quote from the story is as follows:
Sen. Norm Coleman of Minnesota, the panel's senior Republican, said high interest rates on credit cards, "hefty fees and crippling penalties impede more and more hard-working families from pursuing their American dream."
The problem is worsened by the "impenetrable" language of credit card disclosures provided to consumers, he said.
Muisic to my ears. Have the Republicans finally realized that this is not only a critical issue, but one that will resonate with voters who are becoming less and less distracted by political smokescreens aimed at side-stepping domestic policy debates?
Comments (24)
It's a red herring. Disclosure is the industry's fallback position, and it's a canard. No one reads these agreements. The industry fights disclosure because, for the most part, they know they can live with it (ink's cheap). The members know that too.
Norm Coleman asking for clearer disclosures is not going to help anyone, because all the co's will do is put universal default in English. "Your interest rate on this card is expressly dependent on your existing credit profile. If that changes in any way, we reserve the right to increase your interest rate up to [3000%] at our sole election. By way of illustration, we reserve the right to raise your rate to up to 30% if late payments show up on your credit report because that increases your risk profile for us and make it less likely that we'll get paid back." Bury that in 30 other pages of clearly written terms and conditions and no one will be the wiser.
March 7, 2007 12:42 PM | Reply | Permalink
It is not disclosures that we need, it is a more sane and rational approach to policies of this industry. While I have no problem with lending being risk-based, I do take issue with the quantum steps this industry takes in their punitive policies. It is clear that the plurality of the card companies engage in "Gotcha" marketing. With their need to fund their massive marketing campaigns, the card companies with the cooperation of the credit bureaus, coupled with both the Marquette and Smiley decision have been able to corner unsuspecting mullets on which to apply their unethical practices (extortionate fees, universal default, random rate increases, default interest rates, etc.).
It is not clear to me why these companies don't apply rationally retlated risk-based pricing practices, such as tiered interest rates (based on creditworthiness, incentive payment rewards and other incentive marketing programs rather than relying on "Gotcha" techniques. They could earn both respectable profits, and gain respect for a quite tainted industry.
March 7, 2007 2:35 PM | Reply | Permalink
Asking for "rational" from these heartless two-legged critters in the loan shark business is asking a bit much, no?
********
- We do not act rightly because we have virture, we have virtue because we act rightly.
Sign the Petition at stopIranWar.com
March 7, 2007 4:16 PM | Reply | Permalink
Coleman is a political weathervane, having jumped parties when it became advantageous to do so. Now, with Al Franken poised for a run at his seat, I think this is just an attempt by Coleman to burnish his progressive credentials with a bit of grandstanding.
March 7, 2007 4:30 PM | Reply | Permalink
And lets not forget their "you've been pre-approved" scam. The one where they offer to send you a pre-approved card with a credit limit of, say $300.00. What the disclosure doesn't say (or if it does say, its buried in legalese) is that the annual fee, processing fee and other fees associated with possessing the card are charged to the card, reducing your actual credit limit to about $125.00, so that you are indebted to them for $175.00 plus interest before you even get the card.
And lets not forget that the changes to the bankruptcy laws simultaneously stipped you of some the protection you once enjoyed and allowed the credit card companies to raise the minimum monthly payment on your balance. All thanks to Congressional Republicans such as Sen. Coleman.
Not only should the credit industry be investigated, but they should be made to pay the monetary cost of the investigation.... plus interest of course.
March 7, 2007 5:50 PM | Reply | Permalink
Re; And lets not forget that the changes to the bankruptcy laws simultaneously stipped you of some the protection you once enjoyed and allowed the credit card companies to raise the minimum monthly payment on your balance.
This is not quite what happened. The credit card companies were not "allowed" to raise the minimum monthly payment; they were forced to by the government. In point of fact they did not want to do this for the obvious reason that the longer it takes people to pay off their balances the more money they make. And this was an independent change in refulation, unconnected with the bankruptcy bill.
March 7, 2007 6:20 PM | Reply | Permalink
The only lasting solution to this problem is to stop using credit cards, and stop risky lending to consumers, by completely overhauling our monetary system. Loading banks up with more regulation will only make things worse, and the expensive attorneys in the banking industry will only find ways around the new laws, to accomplish the same goals, or face bank failures.
Jim Anderson
The Truth About Credit
Facebook Profile
March 7, 2007 8:45 PM | Reply | Permalink
yeah, I agree with you on this one. While I wasn't totally impressed with the film "maxed out" (www.maxedoutmovie.com), it was interesting to learn that, after the personal bankruptcy bill passed, millions of people were asked to sign up for credit cards.
Of course, Norm Coleman-- my senator, voted for this [Roll Call.
So his actions and words don't match up...
In general, I don't understand why people don't stop using credit cards after getting into debt. To me, the fees and interest rates are a BIG reason to pay your bill on time each month.
March 7, 2007 10:32 PM | Reply | Permalink
Delighted to hear
the former democratic mayor of St. Paul has made this statement, though as an ex-Minnesotan I'm as suspicious of him as others in this chain are.
Now I'm waiting to see what the esteemed Democratic Senator from MBNA Delaware has to say.
aMike
March 8, 2007 4:50 AM | Reply | Permalink
"Have the Republicans finally realized that this is not only a critical issue, but one that will resonate with voters who are becoming less and less distracted by political smokescreens aimed at side-stepping domestic policy debates?"
If the Republicans have finally so realized, can the Democrats be far behind?
March 8, 2007 7:04 AM | Reply | Permalink
In general, I don't understand why people don't stop using credit cards after getting into debt.
In general, I suspect there are two reasons.
1. A lot of people these days live close enough to the margin that there isn't room for unanticipated expenses. When I was in grad school, my father died, and going home cost three thousand bucks, or almost 1/3 of my annual income at the time. I charged it.
2. Current credit practices make it difficult to measure the difference between being solvent and insolvent. With universal default, what seems like a manageable level of debt can very quickly become crippling. After charging those tickets (this was a decade ago), out of sheer grief I missed a few credit card/student loan payments. If they had been able to treat me then how they could today, making the minimum payment on the stipend I had to live on would probably have been impossible.
March 8, 2007 9:32 AM | Reply | Permalink
These sound like reasonable excuses, but credit cards are not emergency funds. Using as such is asking for financial problems. So in reality these are poor excuses. It far better to save money until you have 6 months of expenses in emergency money. Sell stuff on eBay if you have to, but get the fund created. You can do this even if you are living close to the edge if you really are comitted to being financially responsible. It will be much easier to recover from an emergency.
Jim Anderson
The Truth About Credit
Facebook Profile
March 8, 2007 2:43 PM | Reply | Permalink
This is all good advice, but so is 'buy low, sell high.'
There are, first, a lot of people who have nothing of value to sell, and no way to sell it. It seems to me that, the more this is the case for you, the more you really need to have in reserve for emergencies, because you have less margin, and are exposed to more risk.
In my case, if push comes to shove, there are a lot of ways I could come up with a big chunk of money if I had to - asking relatives, cutting back on expenses, taking on extra work. For some of my wife's former clients in Eastern Kentucky, they own nothing that is an asset. They have no relatives who can help them out with money. They work for minimum wage when they are lucky enough to have work. They are more likely than me to get fired, to get debilitating diseases, etc. On the wages you make working at Dairy Queen, it takes a hell of a long time to get 6 months of cash reserves.
(Of course, they also don't have credit, but you get the idea.)
March 8, 2007 2:52 PM | Reply | Permalink
Re: When I was in grad school, my father died, and going home cost three thousand bucks, or almost 1/3 of my annual income at the time.
Wow, where did you have to go home to? That sounds like the price of a flight overseas during the holiday season! Even when I've had to arrange sudden flights (for job interviews, funerals etc.) I've never paid more than $500 for anywhere in the US.
March 8, 2007 6:18 PM | Reply | Permalink
Re: So in reality these are poor excuses.
I have to call; BS on the one. Telling someone that the death of a close family member is a "poor excuse" for spending money is something that even Mr Scrooge might have checked himself before saying. Good grief. Every now and then there are things in life that matter more than your bottom line.
March 8, 2007 6:22 PM | Reply | Permalink
Well, it was me and my wife, flying cross country. I rather suspect that the way they calculate 'bereavement fares' is to jack up the price by three or four times and see if you notice. But then again, this was just about pre-Priceline, not to mention pre-fears of bankruptcy (theirs, not mine), so I doubt it'd be quite that bad now.
Besides, in all likelihood, my memory is inaccurate....
March 8, 2007 6:28 PM | Reply | Permalink
You misinterpreted what I said. I didn't say, "poor excuse for spending money". It is a poor excuse for making a credit card a necessity. We think credit cards are necessary, but in reality they are just a very expensive convenience. It is a myth that they are financial tools. Credit cards are a tool to help banks pickpocket account holders. For the cardholder debt adds considerable risk and doesn't bring prosperity. Wealthy people don't use consumer debt as much as people think.
Some say that credit cards are necessary because the lower income people need them to get ahead. Hogwash!!! Credit cards are simply a form of predatory lending designed to take advantage of lower-income people and benefit only the owners of the banks. Ask Elizabeth Warren, the expert on this. Citibank executives even admitted to her that they target cardholders who are likely to default because that is where they make the most money. You can find the story in her book, "The Two-Income Trap". This is also true of Cash Advances, Payday Loans, Rent-to-Own, Title Pawning, and Tote-the-Note Car Lots. We create more poor with these businesses.
Jim Anderson
The Truth About Credit
Facebook Profile
March 9, 2007 8:45 AM | Reply | Permalink
I think you are right that credit cards are poor financial tools (and I didn't take your post as a personal critique, just so you know). Well, I guess they are great financial tools.... for citibank.
I do disagree on two points: 1. though it's a bad way to address monetary needs, for some people in some situations, it can be the only way they have. 2. sometimes, for some reasons, they can be useful tools for non-financial purposes that have long-term financial benefits. If you haven't got cash reserves to make small investments, your ability to be mobile and responsive to opportunities is hampered. There are times, I think, where putting a balance on a card can be a form of social mobility - allowing people to move for a better job, finance job retraining, and even to travel, something that seems frivolous but can have effects on one's broadness of mind and sense of possibilities that can, in the long run, be finacially beneficial.
A needle isn't a good tool to use when removing a splinter. But in a pinch, it can work. If you use a credit card the way you would stick a pin into your finger, the results aren't all pleasant, but they can be worth it.
March 9, 2007 9:43 AM | Reply | Permalink
Even if disclosure isn't a total solution, it would at least give consumer an opportunity to understand the terms and conditions of their card. Hopefully the increased exposure generated by the hearings will raise awareness amongst the general public. For instance, Dodd has stated that he will address interchange fees in an upcoming hearing. Americans paid $30 billion in interchange fees last year, about $300 per family, yet over two-thirds of Americans have no idea that interchange exists. Yet, when they are made aware of the fee, 9 out of 10 consumers feel that more disclosure of interchange fees is necessary. This type of public awareness can put much greater pressure on the card companies and Congress to address this situation and affect real change. You can find more information on interchange fees and the need for disclosure at www.unfaircreditcardfees.com.
March 9, 2007 10:07 AM | Reply | Permalink
You can add more to the fine print, but it won't help people understand the hidden terms of their agreement any better.
Jim Anderson
The Truth About Credit
Facebook Profile
March 9, 2007 12:50 PM | Reply | Permalink
I'll give you that. There may be cases where people have benefited this way, but is it worth the risk? The problem most of us don't understand is how to quantify the risk involved. If we could, this would be a risk that would top the chart. We think that taking advantage of this convenience gives us the financing to be upwardly mobile by taking advantage of opportunities we wouldn't otherwise have the means to, but the reality is if those were such good opportunities we could get the help somewhere else. There is no justification. If someone doesn't have any other options, then the credit card company is surely a predator. A person in that position has no business borrowing money.
Borrowing on your credit card to take advantage of an investment? That is just plain crazy. You increase your financial risk way beyond any return you might get - especially with the interest rate you pay.
A bad contract is a bad contract. If you look further than one step ahead, you'd see it is a poor choice no matter what you do with the credit card. You may feel like you got a quick payoff, but in the end you pay for it. You don't win, the bank does.
The needle, IMHO, is the discipline of saving, not using a credit card. The credit card is the splinter. The inevitable emergencies in life can also be splinters. Saving can be painful when you are struggling, but can make life much easier in the long run. You are ready for life's emergencies and opportunities.
Jim Anderson
The Truth About Credit
Facebook ProfileMarch 9, 2007 1:06 PM | Reply | Permalink
Something I think you do need to consider: a sizable fraction of credit card users do not carry a revolving balance but pay the card off in full each month, hence paying no interest. I am one of these people (and generally only use the card two or three times a month). In these cases a credit card represents a short-term, no-interest loan, and that is advantageous.
March 11, 2007 5:34 AM | Reply | Permalink
What about the IRS. They are the worst of the bunch. However as they are the governments Santa Claus all will be left alone.
March 11, 2007 7:11 AM | Reply | Permalink
You must not be familiar with my story then. I used to be one who paid off my account every month for many many years. Then I was caught in a trap which resulted in significant financial consequences.
The credit card account is an open ended account, and the credit card company can charge your account at their discretion, and you are unlikely to be able to fight it - even in court.
There are so many myths about credit cards that have been propogated by banks that people accept these things as facts. You think you are getting "free" money when you don't pay interest. You pay, eventually, one way or another. It is a very sophisticated shell game.
Jim Anderson
The Truth About Credit
Facebook Profile
March 11, 2007 2:54 PM | Reply | Permalink