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.