Credit Card Control
I have been more than a little irked to hear pundits & pols proclaim their concern for the indebtedness of future generations when they’re happy as clams to let students go deep into publicly subsidized student loan debt and sit by silently as nothing is done to shore up the broken public education system. Especially so given that those same pundits & pols were perfectly happy to send our kids off to a war that was funded by debt.
Go to any college and you will find credit card companies handing our credit card offers to young people. With tuition hikes and reductions in financial aid, students are a ripe target. I’m glad to see Obama wants to do something about credit card company business practices. Politico:
On Thursday, 14 CEOs of credit card divisions of major banks will be summoned to a White House meeting that reportedly will include President Barack Obama, Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers. They are expected to demand that the credit card issuers do something to lower interest rates for vulnerable borrowers and increase disclosure of rates and what they mean.
Over the weekend, the administration signaled that it would support legislation on Capitol Hill that would reform credit card practices by, among other provisions, protecting consumers from arbitrary interest rate increases, prohibiting issuers from charging interest on debt that has already been repaid and protecting young consumers from aggressive credit card solicitations.
Obama has some understanding of Behavioral Economics. In his recent book, Predictably Irrational, behavioral economist Dan Ariely told the tale of proposing a self-control credit card to a major bank.
The idea is to allow consumers to set in advance how much they want to spend in each store, each category, and in any time frame to set a self-imposed limit on impulse purchases. The proposed card would even allow them to set their own penalties.
For example, we could set the card to reject purchases over a specified amount or impose a personal penalty — in order to permit the over-limit purchase “x” amount of dollars goes into a long-term savings account. From page 123:
A FEW YEARS ago I was so convinced that a “self-control” credit card was a good idea that I asked for a meeting with one of the major banks. To my delight, this venerable bank responded, and suggested that I come to its corporate headquarters in New York.
I arrived in New York a few weeks later, and after a brief delay at the reception desk, was led into a modern conference room….I started describing the self-control credit card idea as a way to help consumers spend less and save more. At first I think the bankers were a bit stunned. I was suggesting that they help consumers take control of their spending. Did I realize that the bankers and credit card companies made $17 billion a year in interest from these cards? Hello? They should give that up?
Well, I wasn’t that naive. I explained to the bankers that there was a great business proposition behind the idea of a self-control card. “Look,” I said, “the credit card business is cutthroat. You send out six billion direct-mail pieces a year, and all the card offers are about the same.” Reluctantly, they agreed. “But suppose one credit card company stepped out of the pack,” I continued, “and identified itself as a good guy–as an advocate for the credit-crunched consumer? Suppose one company had the guts to offer a card that would actually help consumers control their credit, and better still, divert some of their money into long-term savings?” I glanced around the room. “My bet is that thousands of consumers would cut up their other credit cards-and sign up with you!”
A wave of excitement crossed the room. The bankers nodded their heads and chatted to one another. It was revolutionary! Soon thereafter we all departed. They shook my hand warmly and assured me that we would be talking again, soon.
Well, they never called me back. (It might have been that they were worried about losing the $17 billion in interest charges, or maybe it was just good old procrastination.) But the idea is still there-a self-control credit card-and maybe one day someone will take the next step.
I have proposed that this idea would be perfect for groups like Working Assets which set up credit cards for social ends. Or that a consumer advocacy organization set up the self-control credit card on its own. So far the idea has gotten no traction. Maybe now the time is right.
10 Responses to “Credit Card Control”
Amen!!
I have mixed feelings as this falls under the category of the government protecting people from themselves, and I also question how many of the people who get credit cards will actually use the self-imposed “brakes”.
Guess who voted for the current 'loan shark' credit card bill – Joe Biden. Seems his vote back then was for the usuary Delaware banks instead of the 'common man' riding the train.
Well, here is a topic I am in complete alignment with my friends on the Left. I have been waging a losing war, for the most part, as the credit card companies I deal with routinely cut my credit limits to my outstanding balance, which raises my used-to-available debt ratio, which lowers my credit score, which then they use to raise my rates.
That really pisses me off. I have decades of credit history, have always kept my debt load manageable, have in 25+ years been late on exactly a grand total of 2 payments, each time by mistake and corrected within 10 days. We have a very high income, low mortgage, so wht the hell do they keep treating us like we are deadbeats.
The simple answer is they can. And this one IS the fault of Congress (both parties share in the blame) and President Bush. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 basically made sure the credit card companies could count on a much, much lower amount of excess debt to be discharged in bankruptcy courts, and lead to first their offering of credit to almost anyone (it was no low risk), and their current practices of legal loan sharking.
As a side note, ever wonder why so many credit card companies are based in South Dakota or Delaware? It is because they have no usury laws capping the amount of interest the companies can charge. How many of you have read the fine print on your T&C's for your card, BTW? Most cards today have a max default rate of 29.99% – 39.99%. I meant it when I said loan sharks.
I am lucky that I have both the income to pay off most of my balances at will, or use the credit card companies against each other using low-rate transfers, but I know most people do not. There are not a lot of industries I really believe as a whole actively work to harm their users, but credit card companies are one of them.
AR I don't see how what is being proposed would help your dilemma.
In 30 years of using credit cards I have only carried a balance over to the next month twice. The rest of the time I paid the balance in full every month. This isn't because I was lucky or rich, it was because I didn't buy stuff I couldn't afford. The best way to handle the credit card industry is don't take their loans in the first place.
DaGoat – it is not a dilemma for me, I am not in credit trouble, it just pisses me off. It is however hurting and causing a dilemma for many others who are not in my circumstances.
They may have had more credit outstanding than they should have, for whatever reason, but were managing it. Now, through no fault of their own, the credit card companies actions tank their credit scores, and raise their payments due to significantly higher rates (at a time of historically low inter- and intra-bank, and Fed lending, rates, btw), which in turn doubles or triples their monthly cash requirements.
As is well known from my posts here, I am not one to defend those who put themselves in dire straights and want relief after the fact, but for an awful lot of people out there this is just not the case for this issue.
My father-in-law, a millionaire many times over, is having the exact same thing I described happen to him. He uses his cards as short-term loans, has more than adequate funds and resources (but doesn't like to tap into investments unless necessary). He has had the same thing happening to him. It is not hurting him, except foring him to use his cash in ways he would prefer not to, but how a man of his means, credit history, etc., would also be a target for those same actions is totally beyond me.
The only explanation is what I said – credit card companies don't care if they push people into bankruptcy. They are now well protected in court, will have massively high-base interest rates, and court ordered repayment.
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Unbelievable.
And this from an industry now trillions of dollars in debt itself!!
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