Card Sharks
The Washington Post has an article today drawing seven crucial distinctions between the lending practices of credit card issuers and loan sharks. If the information is accurate the shylocks look pretty good by comparison:
There's a new law that forces credit card issuers to increase the minimum monthly payments borrowers must make. The good news is that borrowers will pay much less in interest over time. Nevertheless, many consumers might still be better off owing a loan shark money than a credit card company. Here are seven ruthless practices that credit card issuers engage in and loan sharks don't:
Commentary
As I read this article, I wondered what was the author's agenda. The comments following his 7th list item, along with his concluding paragraph, answered my question: he's after greater regulation of the industry, presumably to allow borrowers to more easily declare banruptcy:
Banks and credit card issuers spent millions of dollars lobbying Congress in favor of the 2005 bankruptcy bill. Last time I checked, loan sharking was still illegal. The banking industry's questionable practices are fully protected under the law. If ever an industry needed to be more tightly regulated, it's credit card lending. A shark is a shark, even if it wears a suit and works in a building with marble floors.
In addition to the fact that the industry would vigorously oppose it , there are two other major hurdles standing in the way of making a case for greater regulation of the credit card lending industry- public sentiment and empirical data. Accoring to a
Majorities of the public think that three industries should be more regulated than they are now – health insurance (56%), managed care (55%) and pharmaceuticals (55%). Next on the list comes the oil industry, which 48% believe needs more regulation.
At the other end of the spectrum, very few people think that computer hardware companies (8%), supermarkets (8%) or computer software companies (9%) need more regulation. And relatively few see banks (20%), packaged food companies (24%), car manufacturers (24%) or airlines (27%) as needing more regulation.
Then there is the question of empirical research on the credit card industry: it contradicts the anecdotal evidence and unfounded assumptions upon which the WAPO article rests. Here's what Todd Zywicki, George Mason University Professor and blogger at Volokh Conspiracy wrote in 2000 in a paper entitled "The Economics of Credit Cards":
...both credit card issuers and consumers appear to act in a manner consistent with the predictions of economic theory. It is not necessary to rely on implausible assumptions about consumer irrationality or to devise idiosyncratic models of a failure of competition in the credit card market. This article will present voluminous empirical evidence - most of which has heretofore been ignored in the legal literature - demonstrating that the operation of the credit card market and consumer choice is consistent with rational decision-making subject to real-world constraints. Moreover, this suggests that there is some efficiency loss as a result of bankruptcy, and that at least some of the losses of credit card issuers are absorbed by other consumers. Finally the paper suggests some bankruptcy implications of a proper understanding of the nature of the credit card market and rational credit card use by consumers.
He has also addressed the question of reform and regulation in a piece on Volokh entitled "Bankruptcy Reform and Credit Cards" and in another academic paper entitled "An Economic Analysis of the Consumer Bankruptcy Crisis". In the latter Zwyicki makes clear that consumer bankruptcy is a function of several factors, not just one. Those other factors include " (1) high levels of household indebtedness, including the influences of credit cards and home mortgages; (2) unemployment and downsizing; (3) divorce; and (4) health problems, health care costs, and lack of health insurance." In the former he points out that borrower behavior is also an issue, particularly that excessive credit card borrowing may be a symptom, rather than a cause, of bankruptcy:
...a debtor confronting a downward spiral may increase his credit card borrowing in the period preceding bankruptcy simply because it is his most easily accessible line of credit. It may appear that because credit card borrowing preceded bankruptcy it also precipitated bankruptcy filing, but if the credit card was being used as a source of credit of last resort, this correlation would not support a causal inference. ... One article by Gross and Souleles, for instance find that in the year before bankruptcy, borrowers significantly increase the use of their credit cards, running up their balances rapidly in the period leading up to bankruptcy. ... The bottom line is that the standard argument about the relationship between credit cards and bankruptcy does not appear to be consistent with either economic theory or available evidence.
Populist rhetoric likening credit card lenders to sharks in suits devouring blameless borrowers is not just disingenuous, it distracts attention from the fact that "credit cards" is a two-player game with rules not wholly favorable to either party, rules designed to protect each from the depredations of the other.
Linked at: Don Surber |
Comments
I have had credit cards in the past, but no more. I had a credit card that had a $2000.00 balance on it which I always paid on time, every time. It jumped from 14% to 21% for no apparent reason other than they just decided to up the rate. I complained to the company and they lowered it to 14%. I paid the card off and canceled it.
I took out another credit card at 0% for one year. After that it was to go up to 7.99%. I took this card out for emergencies. The fine print on this card read that if you missed a payment the interest rate would go up to over 20% "Can't remember the exact figure". Anyway, I had a balance on this card. Six months into the trial period (NEVER MISSED A PAYMENT) the credit card company moved the due date up by five days. “They probably sent a letter along with all the rest of the junk mail that comes with the card. “Must have missed it.” Fortunately I caught this and still never missed a payment. After the 0% trial period was up the card went to 7.99%. “Like they said it would” I kept the card at 7.99% for the next year. "Never missed a payment". And as of January 06 the credit card company in formed me that they will be raising their rate to 13.99%.
So I get punished for being a good customer. They raise their rates for no other reason than to get more money from you. So I paid it off.
I am fortunate to be able to pay these cards off. But I know that there are a lot of people that aren’t able to do this. And if the credit card companies treat a good customer like this, then how on earth are good people that are having financial trouble ever going to be able to escape these LOAN SHARKS.
I have heard many similar stories. Loan Sharks (YES) I believe credit card companies need to be regulated.
Thank You
Posted by: James B | March 26, 2006 7:34 PM
Dear "Judge Roy Bean"
When you stop hiding behind an anonymous website I'll be happy to address the substance of your question.
Posted by: Starling | February 8, 2006 7:56 PM
DL,
Thanks for the comment. I agree that people have, in general, have fewer problems with banks than banks and credit card companies. I also agree that this fact does not make bank and credit card practices ethical.
The reason I mentioned these things is because the lack of public demand for regulation of an industry is an enormous barrier to getting legislation passed that would achieve the end the author wants to see. Your point, i.e. that people have fewer problems with banks than car dealers, would seem to support mine rather than be an alternative to it.
As for ethicality, that was not my primary concern. I agree that many of the industry's practices are abhorrent. They offend my sensibilities as well. Similarly, those sensibilities are also offended the behavior of irresponsible borrowers and straight-out crooks who make interest rates higher on people who pay for what they buy and live within their means. The question at hand, however, is not my sense of ethics, or yours. Rather, it is what ought to be done about the situation that matters. The two options, as I see it, are greater regulation and greater education. The former route is going to be plagued by obvious hurdles, particularly industry resistance. (Whether the industry ought to resist is another issue.) For me the latter is preferable because it puts needed emphasis on borrowers to learn how to manage their financial affairs properly, i.e. can recognize sketchy behavior when they see it and how to make use of othe financial instruments when times get tough.
You ask about the finances of poor folks and how they pay for their cars. I do have many relatives that are poor. Of those whom have cars, all drive old ones. I know of no one, relative or not, that has a 10-20 year car loan. Is there such a thing? Hopefully there is not!
thanks again for your comment.
thoughtfully,
starling
Posted by: Starling | February 8, 2006 7:49 PM
"Accoring to a Harris Interactive poll conducted in February 2004, banks are way down the list of industries that the American public thinks needs more regulation:"
This is simply because people have fewer problems with Banks than say car dealers - that doesn't mean the practices are ethical -the advertising alone for lines of credit mortgages is obscene - how many poorer class folks pay 10-20 year loans this way for their car?
Posted by: DL | February 7, 2006 4:22 PM
You're not serious: "Populist rhetoric likening credit card lenders to sharks in suits devouring blameless borrowers is not just disingenuous, it distracts attention from the fact that "credit cards" is a two-player game with rules not wholly favorable to either party, rules designed to protect each from the depredations of the other."
Talk about disingenuous - someone purporting to educate the public about business should show a little more responsibility in making such outlandish statements.
The "rules" were promulgated (and in some cases, even written) by the lobbyists for the financial services industry in order to minimize consumer's ability to protect themselves.
And that isn't "populist rhetoric," it's the cold, hard fact. Please point to a "rule" that is not favorable to the industry?
Posted by: Judge Roy Bean | February 7, 2006 1:54 AM