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Monday, July 14, 2008

Where Credit Is Due

You may have heard that there is a credit crisis in the US (or you may have been living in a cave for the last six months). The housing bubble has deflated, making a very rude noise in the process, and some homeowners, out of equity and strapped for cash, are getting in over their heads on their credit cards as well. In response, creditors have tightened restrictions and in some cases raised rates for customers who had paid all their bills on time — not only on future debt but on existing debt as well. (I can't remember now which pundit remarked that the legality of credit card companies' raising rates on existing debt whenever they feel like it proves beyond any doubt for whom lawmakers work. Hint: it's not you and I.)

In turn, Barack Obama among others has proposed a "credit card bill of rights" that would forbid this practice, as well as prohibiting so-called universal default clauses and requiring disclosure of reasons that credit-card companies can raise interest rates. No more "whenever we feel like it": they will have to spell out, if (and only if) you do x, we can do y.

You will be shocked to hear that credit-card companies hate this idea. They're used to having it all their way (witness so-called bankruptcy reform); I can remember when it was considered bad form for respectable creditors to base their business model on trying to mire their customers too deeply for them to get out within the next decade, but not so far that they would throw in the towel and declare bankruptcy. Time was when you would know you were over your credit limit because your transaction would be declined; now you find out when you get your bill and discover that you've been socked with a fat fee and your interest rate has doubled, probably not only on that card but on any others you may have as well. Credit grantors call all these dirty tricks "risk pricing," and say that if they're not allowed to use them, they may (gasp!) have to refuse some people credit.

My gut reaction to this is, damn right. If a company can't grant someone credit on reasonable terms, it shouldn't be granting it at all. I'm trying to decide if this is really a good idea. I frankly can't see any benefit in losing sleep and getting ulcers because you can't pay off debt you never should have been able to incur in the first place; but what if your car dies, say, and you need it to get to work, and you don't have the cash to get it fixed or buy another one? Obama says he will encourage banks and credit unions to make so-called micro-loans; I like this too, but I'm not sure it will really work.

One thing that really bugs me about all this is that people (like me) who pay their balances in full every month can get much lower interest rates than people who live close to the edge, and the latter are much more likely to miss a payment and get their rate jacked up even more. I suppose this is yet another illustration of the old maxim that you can qualify for a loan only if you don't need one. I do understand why creditors do this: it's risk pricing again, the idea being that if they're lending money to two pools of customers, A and B, and B is twice as likely to default as A, B's rate needs to be higher to produce the same profit on both pools. I can't help feeling that there's something basically wrong here, though. From the individual customer's point of view, having to pay a higher rate will make default still more likely, not to mention the predicament of the poor schnook who finds himself rudely dumped from pool A into pool B because he missed a payment on some other card.

There's a simple counterargument to all of this, of course: if you can't pay a loan, don't take one out; if you can't afford a house, wait until you can. But a high percentage of bankrupts got pushed over the edge due to unforeseen medical bills (which is the topic of another rant entire: can you say "universal health care"?) or other catastrophic events; they get looked on as deadbeats and riffraff, while the executives making the risky loans get... huge bonuses and nice severance packages if the whole house of cards actually collapses.

All right, rant over. What do you think?

10 Comments:

  • Every news article I read about this current crunch makes my eyes bug. How come banks were allowed to make all these bad loans? How come we have to bail them out? Where are the lifeguards? Where is the personal responsibility of borrowers? Why do some of us feel entitled to whatever we see? Why are there those who are allowed to indulge those whims? Yeesh. I just want to shake someone!

    By Blogger Annie, at 10:25 PM  

  • I think it needs to extend beyond just governing the credit card companies. I mean, c'mon, they are a business and they do provide written notification of fee schedules, etc. Yes, the language could be clearer and yes, I remember when your cc would be declined b/c you had 'insufficient' credit for the purchase. But, also, recently my bank stopped the "insufficient funds" thing at the ATM-- even if I am broke, it will give me money. I will incur fees and overdraft and all that, but it doesn't stop me.
    It really needs to begin in high school and teaching people about credit. We have one set of friends who are upside down in their mortgage, two new car loans, a new baby, school payments... and they don't understand why we can't go on vacation with them this year. "put it on a credit card!" they said... um no. Personal responsibility with money is something we are learning and are proud of. I remember when I got my first credit card and my dad said "just b/c you have credit, doesn't mean you have money". I have had the medical bills. I have had the car payments ( i have them again, what was I thinking!).

    By Blogger Mini, at 8:42 AM  

  • Situations that are good for the economy are not necessarily good for the individual. There are a few rare individuals who have no debt but rather have a savings account. People who live modestly and within their means. there is a fine line between modest and miser, between responsible debt, and irrational spending. Is it better to rescue people from their mistakes, or let them suffer? I don't know. Our house and cars are paid off, but we carry a balance on the credit card. I HATE paying interest, but we can't seem to catch up. And every day in the mail, some lending institution is offering us the opportunity to owe them money. Interest payments make the nation run.

    By Blogger Roxie, at 9:30 AM  

  • I understand banking and credit very well, having worked in banking for years (I don't any more). What I don't quite understand is the crazy interest rates (well, I understand it's all about the profit). Savings rates are considered "high" right now and they're 3% - or something like that. But credit card companies didn't lower their rates (when the other rates were low).

    Anyway. I also understand (having been in certain situations) how easily a person can get dragged down in debt, and charge offs and things like that. For alot of people, it's simply a matter of losing a job (or getting injured). For single parents, and those living at, below, or close to the poverty level, it doesn't take much to drag you down.

    In a perfect situation, people would not have more debt than they can pay off in a month. They would also have savings/investment income to fall back on if something unforseen happened. They would also earn enough income to pay for those "extras" like housing, electricity, heat, food, etc.

    Which gets us into medical care, the minimum wage, and a slew of other "hot" topics.

    The bottom line? We are a NATION with a HUGE debt, why would we think that individuals would be any different? As a nation, we get into things we can't pay for.

    Ok. I'm done now. :-) Thank you for sharing your thoughts with us, Lucia.

    By Blogger AngeliasKnitting, at 11:31 AM  

  • yes yes yes and yes. the whole credit thing has never made sense to me; it seems to be a case of catering to people with money. people make their share of bad choices, but if i'm overdrawn and get a $30/day fee until i realize i'm overdrawn and get some money in there (which then has to be a higher amount to cover the fee), the debt racks up quickly. if more fees are always going to people who can least afford them, how will they ever make it to group A?

    i grew up in a very poor family, and yet my father is one of the most hard-working people i know. and he doesn't throw money around or buy much of anything. i've always been very careful to save money and pay my bills on time. once i was an hour late paying a credit bill (thanks to the time difference between alaska and the east coast, and having to pay the bill the day i got my paycheck), and even though it was the first time in oh, 6-7 years of having that card, they jacked my rate up. so i paid it off and haven't used the card for almost a year, because i just didn't appreciate the lack of common sense there. i'm sure they didn't notice, but i felt better ;)

    somewhere the balance between personal and corporate responsibility is off. we shouldn't be spending money we don't have quite so much, and the companies shouldn't be trying to drag people under while they're not looking. but like angeliasknitting said, the country's debt is huge, and the only way we can keep operating is to go farther and farther in debt (i've never understood the "budget surpluses" they mention sometimes - shouldn't that go on the trillions of debt?)

    and why i should be responsible for debts i incur, and yet the banks should be helped out of making bad loans, i don't know. my husband works for a bank, and they weren't hit that hard because they have stricter guidlines on loans. the responsibility goes both ways i think.

    thanks for your well-written post though, it got me thinking!

    By Blogger the boogeyman's wife, at 2:43 PM  

  • Until the American dream of keeping up with the Joneses goes away in this country, I don't see things changing.

    People will always do whatever it takes to get "stuff" and there will always be people there more than willing to "help" them.

    I saw a news report of a couple who lost their house and were living in a trailer. The husband blamed everyone but himself. He wanted someone to save him. Even though, he was the one who took out a second in order to make his house payment. While I do not remember algebra, I do remember those consumer economics classes.

    Then again, I was raised to see credit the same way you do the neighbors. You only call on them for help when you really need it. It's a shame that more people don't see it that way.

    By Blogger Cookie, at 3:21 PM  

  • The other night there was a documentary about the Roman Empire on TV, and it gave me chills when they explained about the gradual but unstoppable collapse of the Romans' currency. Scary parallels there... though I daresay you and Grant would be able to explain it even better.

    By Anonymous Beth S., at 2:18 PM  

  • I agree. The whole thing is infuriating. Living in Canada the situation isn't as dire as it is where you are, but there are parallels, and the principles of good debt vs ill-advised debt is the same. I have to admit, I'm no genius when it comes to finances. I have a balance on my credit card as we speak, unfortunately, but I also know that there is money coming in the very near future that will more than cover that debt. As for interest rates on cards? Asinine. Start giving me something in the way of service for the money you hit me up for in interest. You know what? Perhaps the cc companies ought to *earn* the interest rather than simply grab all they can. And what about the idea of the National Bank's interest rate? It fluctuates to reflect the current economy. When the economy is low, it needs people to spend, so the interest rates are low. Not a great reason to save, and easy to get a loan from the bank. No need for the population to spend to bolster the economy? Ok, let them save. Up goes the interest rate. Not so with credit cards. They're just a regular old business who can set their own rates. Super.

    Anyway, I should probably stop now. I need to go to bed! Thanks for the thought provoking post!

    By Anonymous Sarahfish, at 11:43 PM  

  • There are various financial services in the market that offer credit card debt management for people who are not able to manage their multiple credit card debts. Hopefully people can find the help they need to eliminate debt. Thanks for the info!

    By Anonymous debt consolidation, at 2:25 AM  

  • I agree with you. Except that if you get your wish for universal health care, then you will deserve the shit for health care quality that will follow.

    By Blogger Laurie, at 7:44 AM  

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