Credit Cards are probably evil
{ Posted on Thursday, January 29, 2009
by alan
}
Political remarks of almost any kind are inflammatory. I've heard Bruxy over at the Meeting House say every ideologue thinks their view is balanced. I know I'm not balanced - Like Peter, the "rock", I'm like how the Leafs ought to be - passionate and with reckless abandon, sometimes to my detriment. But I wear my heart on my sleeve, and today I have a beef with credit cards.
There's a report today in the Star about the Federal budget changes to credit cards. Now I'm all for credit card clarity and increased education, but the numbers are kind of stupid. 23 companies offering 68 different low-cost credit cards? I guess the number of companies is low. Take the major banks, a majority of regional credit unions, and nearly every big box retailer, and I'd put the count at hire than 30 for sure. But the sample here has 68 low-cost credit cards? That's 3 low-cost cards per company! That's just wrong.
When I was in undergrad at WLU, introductory credit cards were a dime a dozen. I never did use those GM points, nevermind that had I thought about it I probably would have correctly deduced I'd never buy a GM car. But clearly, the card companies are there because credit cards are easy money. It's fail-proof, but certainly not dummy-proof. You can't cover your costs? Raise your rates. I can't read the fine print? My loss. I can read the fine print, but not understand it? Too bad.
I've heard stupid statistics outside too. Once I heard the average American has $12,000 in credit card debt. AVERAGE! $12,000! How many people are smart enough, like a good number of my friends, who have credit cards but never carry a balance? We bring the average way down. Who's bringing the average up!??! My money says credit cards are really a tax on the vulnerable with proceeds going to a distant corporation owned by lots of people who don't carry balances on their credit cards. I think James has something to say about that.
Says in the article, that Liberals want a 12% cap above prime. NDP want the cap at 5%. I would be happy with 10% or less. My point is this: Put limits on the profitability. You clean up the beach, and the pigeons won't s**t on the sand. If credit cards need to maintain profit at 5%+prime, you can bet the corporations will make sure there's a whole lot less defaults, and offer a whole lot less credit for people who can't carry it. It's simple regulation, but regulation in defence of those who need it most.
There's a report today in the Star about the Federal budget changes to credit cards. Now I'm all for credit card clarity and increased education, but the numbers are kind of stupid. 23 companies offering 68 different low-cost credit cards? I guess the number of companies is low. Take the major banks, a majority of regional credit unions, and nearly every big box retailer, and I'd put the count at hire than 30 for sure. But the sample here has 68 low-cost credit cards? That's 3 low-cost cards per company! That's just wrong.
When I was in undergrad at WLU, introductory credit cards were a dime a dozen. I never did use those GM points, nevermind that had I thought about it I probably would have correctly deduced I'd never buy a GM car. But clearly, the card companies are there because credit cards are easy money. It's fail-proof, but certainly not dummy-proof. You can't cover your costs? Raise your rates. I can't read the fine print? My loss. I can read the fine print, but not understand it? Too bad.
I've heard stupid statistics outside too. Once I heard the average American has $12,000 in credit card debt. AVERAGE! $12,000! How many people are smart enough, like a good number of my friends, who have credit cards but never carry a balance? We bring the average way down. Who's bringing the average up!??! My money says credit cards are really a tax on the vulnerable with proceeds going to a distant corporation owned by lots of people who don't carry balances on their credit cards. I think James has something to say about that.
Says in the article, that Liberals want a 12% cap above prime. NDP want the cap at 5%. I would be happy with 10% or less. My point is this: Put limits on the profitability. You clean up the beach, and the pigeons won't s**t on the sand. If credit cards need to maintain profit at 5%+prime, you can bet the corporations will make sure there's a whole lot less defaults, and offer a whole lot less credit for people who can't carry it. It's simple regulation, but regulation in defence of those who need it most.
5 Response to "Credit Cards are probably evil"
interesting thoughts. i'm not saying i disagree, but i wonder, if credit card interest is indeed a tax on the stupid, and you associate our responsibilities to helping the "needy", are you implying that the stupid are people in need? when does it become someones personal responsibility to know what they are getting themselves into? and isn't the answer, not to regulate limits on profit, but rather to educate people on the risks of credit card debt? i'm just not sure that limiting a company's ability to earn profit is the right answer in this situation as much as a agree that credit card debt is a huge problem that requires some sort of resolution.
Thanks for the comment. For the most part, I'd like to think that I've used some creative license in the telling of the tale.
I guess the question back to you, is at what point does interest become usury in our climate (noting of course, in developing world - rates can customarily rate in the 100's of % annually)? This is less a question of limiting profits, but regulating rates - I think it's perfectly fair to allow a company to make as much profit as it can within the rules.
Secondly, I challenge you to look at the last link (highlighted: "regulation in defence of those who need it most", and see if there's a broad application to answer your question. In this, I will not even try to convince you - but I myself am convicted of.
Regulation of rates may be attractive politically...but taken far enough (P+5%), would move the cards market to a convenience user only market (ie people who repay all balances at the end of every month--shock). At P+5%, there really is no profit for card issuers. So they would start juicing interchange fees to merchants (which hits everyone--and by the way card issuers are now public companies as opposed to not-for-profits--a recent phenom) and deny credit to anyone with any blemishes on their track record.
While 22% rates seem horrible, they amount to a high charge for convenience. Borrowing a thousand dollars for a month, at any bank machine, no questions asked, costs $20--far less than whatever they payday guys are charging.
Due to the recession, some US card issuers are getting close to the point where they really make no money--losses are at 7.2% for December 2008 (more than double the approx 3% for Canada), and with the credit crunch, their cost of funding is skyrocketing. So anyway--I think capping rates isn't the answer and the market is punishing overly aggressive issuers just fine. Cards also help people build a history (as long as they pay!) and people need them to rent cars, etc.--so denying them to a massive swath of lower income people would be an unfortunate and unintended consequence.
A few suggestions--require simpler disclosure (ie disclose that you need TWO months of full payment on time before interest stops getting accrued--go back and read that fine print!), require that minimum payment rates be increased (in some cases it's less than the interest accrual--ouch!), consider more regulation for payday/tax refund advance services, broaden eligibility for property tax credits, and replacing more of the GST with progressive taxation at the income level.
Welcome to the show, Huston! Thanks for the data. Your untenable outcomes are not necessarily a bad thing, in my view.
Why shouldn't credit cards be strictly for convenience? Personally, I shouldn't ever use a credit card. Except it delays my payments for purchases a few weeks, it conveniently puts all my spending in one report, and builds my reward points.
And while I agree the benefits you note are helpful, I'm sure it's more complicated than that. Low income owners renting a car, is like throwing good money after bad. How long will they be paying it off. When does 22% annually outstrip what the principle was even spent on?
I'm not convinced that denying credit is a bad thing - a cap (whether P+5 or P+15) constrains the damage to the consumer exclusively. Increased fees are shared and vendors can make decisions on whether to accept them.
As for the payday guys, they only take it from you once. I don't have a problem with them. They provide a service where the banks will not. And when the banks return, they disappear. Credit cards are ubiquitous. A convenience for me, a high charge for some, and a weight on the vulnerable (not necessarily stupid or poor).
As for issuer struggles, I'm surprised their losses are that low. For years in a growing economy, we've been overspending ourselves, paying minimums (with principle growing - yes, ouch indeed!), and now we can't even do that. Losses should be more, and if issuers don't start denying credit, they will be the more we recess.
Lastly - my GOD, you need TWO FULL PAYMENTS before the bleeding stops?!?! And I thought I knew the fine print.
Thanks again for the comment - here's to seeing some of those good suggestions coming down the pipe through the current budget!
Always love a good debate...hopefully this rathole has an end...
People need to rent cars for legit reasons. They can't find jobs for both parents in the same spot, are caregivers to a friend/the elderly, etc.. Most payday loans get rolled over (at ridiculous rates--if you need $500 that bad, chances are you actually need much more). And let's face it, there *is* a market for borrowing a grand for a month at any of ten thousand ATM locations for $20.
But enough on credit cards. Rather than getting into the weeds, let's think about the following:
What regulatory actions have helped?
- minimum downpayments for uninsured mortgages (made for a more stable market)
- no write-off of student loan debt but deductibility (makes it affordable, reduced losses and aavailability to others)
- RRSPs (encourages saving of an amount that will help with society many years down the road)
- progressive income taxation (no tax for thos who make say ten grand, tax rates escalate with income)
- no usurious interest rates (60% currently)
When thinking of lending regulation, it's helpful to put things in context--where do we want our politicians using their gunpowder?
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