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?