After the recent market tumble, Alan Greenspan expressed his shock at the way the markets had behaved, and noted flaws in his assumptions about how and why institutions would protect themselves. At the same time, there's also been a discussion of the need perceived by some to shift away from capitalism. That's a specific response and fairly broad brush. Until and unless we're ready to just throw out capitalism altogether, I think the really important observation in Greenspan's remarks is that there are assumptions built into the policies we make, both about the problems to be solved and about the likely effects of the cures we create. We need to make those assumptions explicit, make sure our policies are really doing what we intend, and make sure there are not unintended side effects.
One of the assumptions built into the credit card model is that customers are able to negotiate a better rate or terms. Contract law, in general, is not a theory that pre-establishes the fair price of individual arrangements, nor does it assume that some government establishes a fair price. Rather, it assumes that two parties enter into a contractual arrangement voluntarily, each with something to gain, and moreover each knowing that if the arrangement is not suitable, they would walk away from the deal.
While credit cards do vary in interest rate and fees, there are many ways in which they do not vary, and in which all credit cards offer a pretty similar array of terms. And that's that. There's no way to respond to a credit card offer by saying, “I like this term but not that one. Can I get a modification?” And unless another card offers the modification you want, you take what you are offered or you take nothing. Because for many people in many circumstances, it's pretty much the only game in town.
Robert Krulwich did a nice report a while back, perhaps for television, on why credit card companies don't seem to be competitive about their rates. I searched for a record of it on the web and didn't find it; if someone has a pointer to it, I'd appreciate it. Meanwhile, I'll cite merely my recollection, in which I believe he identified three key kinds of customers, none of whom constituted a reason for the credit card companies to lower rates to woo business:
Customers who will never pay credit card interest because they pay in full every month. The credit card companies don't actually like these people because they aren't a good source of income. They're referred to in the industry as “freeloaders” and since they won't be paying interest anyway, how the credit card sets the interest rate is of no concern to them.
Customers who think they will never pay credit card interest, but are wrong. These are people the credit card companies definitely want, not just because they will pay interest fees but because their finances are close enough to being in order that they'll be good credit risks. Unfortunately, these customers don't care about the interest rate since they don't plan to pay interest, so there is no tactical advantage for the credit card company to lower their rates to attract this kind of customer.
Customers who know they will be paying lots of interest. The fact that these customers are arriving knowing they will run up bills that require paying interest means they don't have their finances totally in order. As I recall, the credit card companies aren't motivated to make it better for these people either because they're not sure how much of their business they want.
Exactly because the terms tend to be so unfavorable, some people suggest never using credit cards at all. But that's tricky to manage in modern society. Just for starters, there are many things in society that require paying by credit card.
And sometimes there are times where you haven't planned well and end up in a bind that only a credit card can easily dig you out of. I'll be writing more about that case in an upcoming post, but for now I'll just quote the old American Express slogan, “Don't leave home without it.” There's a lot of truth in that advice.
Credit cards are often necessary to use, and yet they are not particularly subject to market forces. Even now, when the government is very concerned about lowering interest rates to get the economy moving, credit card interest rates offer no echo of that downward movement.
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This is one in a series of posts on credit cards.
See also:
“Round Up the Usury Suspects” (3 Dec 2008)
“Hair-Trigger Credit Card ‘Default Rates’” (6 Oct 2008)
Name Your Own Credit Card Rate! (15 Dec 2008)
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Comments
Some will claim that the credit card issue can be reduced to a simple issue of voluntary signing up for a particular set of terms. But I think the complexity of this issue lies in things that are harder to quantize and measure, and hence easier to marginalize and hide. So I think it helps to put a human face on it, even at the risk that some of what I'll say is not full of hard numbers. Lack of hard numbers isn't always proof of lack of a problem. Sometimes the problem has to be recognized and discussed before good numbers are created.
Yes, but...
I went thru bankruptcy early this year, which resulted in dismissal of my credit cards (two VISA, a Discover, and several store cards).
Since I rent a car for trips to Miami, or even to Jax, Orlando or Tampa, a credit card is a necessity. No problemo.
My bank provides a VISA check card, tied to my checking account, which can be used either as a debit OR a credit card. I have no problems at the car rental office, and would expect none if booking a flight or making a hotel reservation.
The great benefit is that I don't EVER live bey0nd my means, as the money is in the account, or the transaction gets refused. I pay NO interest, and incur no debt. My credit score is better now than before I filed Chapter seven.
I don't need the laws to be changed for my own personal circumstance. I have had a better life than many. And one reason I want some of the laws to be changed, which you call attention to by your remark, is that I think they they unjustly reward people who slip out of debt responsibility more than they reward people who do their level best to pay what they owe. So please spare me the discussion of how clean and simple and neat it is to live without credit cards. I didn't get into the problems I had in the way you're probably thinking, and the solution you propose does not solve the full span of problems that credit cards address.
I have another blog post coming soon addressing these remarks in fuller detail. For now, it's worth noting that if you crash that car you've rented for cash, you are going to find it's not true that you're not living beyond your means. Even just driving it is a risk you're not prepared to take and you have no business pretending you're living within your means if you don't have a way to pay in that circumstance.
Your category 3 people ("know they will be paying lots of interest") are almost universally making a mistake. They ought to make life decisions as though that option were not available. Credit cards are a horrible way to finance one's life. They take short-term difficulties and turn them into long-term difficulties. People shouldn't confuse the ease of that credit with its desirability.
So I think most of your concern is (or should be) with the category 2 people, "who think they will never pay credit card interest, but are wrong". These are the ones that we ought to have sympathy for, and see if perhaps some new structure can make the world a better place.
We can certainly have a discussion about whether the safety net in the US is sufficient, or not enough, or too much. But I think that's a separate question from the terms offered by credit card companies, or the general topic of usury.
And my "safety net" example basically says: give up, say that you can't run your life, and we'll be sure you at least stay alive. But it seems a shame, to eliminate all the productive contributions to society that the person had been making.
So you're looking for a cap on the random pain that can be inflicted, with the hope that a marginal member of society can continue being mostly self-sufficient, with perhaps just a little nudge of help now and then.
My basic reaction: this is much of the motivation for bankruptcy. Let me offer the suggestion that you associate too much "shame" with the term, as illustrated in your reaction to Wayne (talking about his improved credit, post-bankruptcy).
If you view bankruptcy as more value-neutral, then the idea is: you tried to run your life, and you're actually cash-flow positive right now, but you made some mistakes in the past, and you've dug into a hole -- given past obligations -- that you can't dig out of. Bankruptcy is society's way of saying: let's wipe the slate clean, and allow you to continue being a net positive member of society. Much better than just the safety net "last resort".
But Kent, you don't seem to like bankruptcy (for these situations), and I'm not entirely sure why.
To me, the combination of: (1) using credit cards (or debit cards) but paying them off in full each month, (2) bankruptcy court, (3) last-resort social safety net; those three seem to address most of the moral issues you've raised about what is happening with credit cards and the free markets.
(I assume you disagree, but I'd be interested to hear the details.)
You made a couple of other remarks to which I take offense.
You compared my position vis a vis "someone who is struggling to pay their bills", when you have no idea of the struggle I underwent for many months prior to filing. Sleepless nights, anxiety, depression, familial disruptions, and more were a large part of my daily existence., so I don't appreciate any holier than thou attitude.
You used the term "shirked my responsibilities", implying that I took a less-than-honorable way out of my dilemma. The bankruptcy laws exist for very good reasons, but if your misplaced sense of pride forbids you from considering them as a source of relief, then I recommend that you just quit your bitching.
You also said, "I didn't get into the problems I had in the way you're probably thinking". Unless I tell you what I'm thinking, (and I didn't), you have absolutely NO basis upon which to presume what I may, or may not be thinking.
Finally, you state, "if you crash that car you've rented for cash, you are going to find it's not true that you're not living beyond your means. Even just driving it is a risk you're not prepared to take and you have no business pretending you're living within your means if you don't have a way to pay in that circumstance."
Sorry, wrong again. I purchase full coverage insurance every time I rent a car. Once again, you make unwarranted assumptions.
How about you just clean up your own act and stop trying to throw dirt on mine.
You may note that I did not indulge in the disingenuous practice of prefacing my response with an insincere phrase like "with all due respect".
However, I reject your implied assertion that all people can just avoid using cards altogether, and your comment did not qualify itself to say "this worked for me, but probably isn't a good general solution". And I don't think it is a good general solution. Certainly not by everyone just starting one day to not use them—the transition would be quite awkward even in the cases where it would work, and would not work for many. I know, in part, because I'm trying to transition my household to minimize use of cards and there are plenty of snags. It depends on the particular life situation of an individual how easily it can work, and all such discussion is off-topic here.
And as a consequence of my belief, telling people they should just not use cards is not the topic of this thread. This thread is about whether or not credit card terms are voluntarily chosen under a free market economic model. I therefore see your comments as out of order. They paint a rosy and unrealistic picture of a happy world where everyone just voluntarily gives up any debt they have and declines to take on future debt and everything just works out. That may not be your intent, but that's what I see you saying, and the entirety of my point is that for you to clarify your intent takes a whole thread, one of its own, not mine. That's why if you want to make any point even related to that, you should make a post of your own, give it a clear description, and host your own debate on just that one issue. Please do not hijack my thread with a discussion of why if the world were different we wouldn't have to have this discussion. The world is not different and the problems addressed here are real for some people. If you want a thread of your own pushing your idea, by all means, make one. It's nice and controversial, and I bet you could make the cover.
(And just as a general recommendation for life outside of OS, I would say that you should never expect to ever poke "Well, I went bankrupt and..." into a discussion and expect the discussion to stay on topic. That's a hot-button thing to say, especially in the present economy, and if no one has told you up to now, and is not only not something that people will have no opinion on, but it is something you should expect will, in an open discussion among people you don't know, risk making people angry. I am not the only one.)
If you would prefer that I remove the discussion between the two of us on this matter, you can tell me (publicly or privately), and I will remove it. I don't think the discussion is appropriate to this thread. But my inclination is to leave it rather than just delete it on my own initiative, lest someone claim I was "censoring".
Oh, and Sir, as it is a bit unclear to me, being a newly joined and charged member of Salon, could you explain your exact objections to I believe, ME?
By the way, your post was fine.