Columnist Michelle Singletary says that card issuers have ridden roughshod over consumers because, well, we're chumps. And because we're greedy. We'll do anything for the privilege of using plastic -- even if that means accepting onerous terms that no one in their right mind would normally accept. In the meantime, the Fed is imposing new -- and tougher -- rules on the credit-card industry, rules that would be unnecessary if we weren't so willing to roll over for the card issuers.
From the story:“I’m mad at credit card companies for making the rules, but I’m also mad at consumers for accepting them,” he said recently when we were discussing the proposed rule changes. “There’s no way those terms were fair to anybody —- no matter how affluent. Consumers should have refused to accept them. If they had, the marketplace would have prevailed and the credit card companies would have withdrawn them.”
He’s right, you know. The Fed wouldn’t have to be imposing these new rules if we weren’t such chumps.
My friend hasn’t used a credit card in years. He doesn’t use credit because he fundamentally does not like the way the companies do business. I admire him for his integrity in this respect. How many times have you sworn at your credit card issuer for some standard practice and yet still pulled out that plastic to pay for something?
Read the rest of the story here (link).
Monday, January 12, 2009
Credit Card Companies Have Run Wild Too Long -- Because We're Chumps
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19 comments:
You get what you sign on for -- and the driving force behind the marketplace going back into antiquity has been "emptor caveat".
With all my heart, I believe that you can protect the consumer only so far. Put up a roadblock to one folly and their quickly find another to blunder into.
This doesn't mean I advocate a free-for-all in the marketplace. Clear disclosure of terms is a must. But, in most cases, if a borrower wants to glean their rate terms, including the right to revise rates on existing balances, it's been there in plain sight without squinting too hard.
There are pluses and minuses to a lender having flexibility in setting rates. Bottom line, if a borrower desired the guarantee of a fixed rate, a fixed rate term loan is always an option.
The fact that lenders have had the option to reset rates to reflect changes in borrower risk as well as changes in the lending environment as freed lenders to offer some of the most competitive rates possible. The strongest creditworthy borrowers will attest to how this has worked in their favor.
Further, I believe most borrowers will attest that lenders have exercised decent restraint in resetting rates. The truth is that a borrower isn't tied to the bank after a reset, and other banks have continued to offer very attractive inducements to transfer balances. Lenders are well aware of this is haven't acted recklessly.
Enacting new restraints on lenders will afford unwary borrowers additional protections. But it also risks that some of the most attractive borrowing opportunities (including 0% rates that are fixed for a year or more) will become more scarce, or carry much higher fees.
Personally, I'm willing to sacrifice protection in favor of more attractive terms.
Harry, big thumbs up for that comment.
One thing that Singletary agrees with you on is that the disclosures were there. She's just saying that we're stupid for accepting them.
As for the protection v. attractive terms aspect, I fall on the side of having more attractive terms -- but that's because I don't carry balances. If I carried a balance, I would be in the other camp.
Because so many people carry balances, this legislation will be seen as a good thing.
What I am saying is that -- for the most part -- people will look out for themselves and be happy or unhappy depending on their payment habits.
If fewer people carried balances there might be better deals available over time.
But we can't have too many people paying in full, Jake. If everyone paid in full, there would be no reason to have BT deals -- and life-of-the-balance deals.
Harry says "it's been there in plain sight without squinting too hard"
I would like to respectfully disagree with this comment. There are way to many confusing and easily misunderstood items in the T&C. These items are deliberately obscured in the hopes that the consumer will overlook and/or misunderstand.
Then Harry says "lenders have exercised decent restraint in resetting rates"
Rubbish. How often do we hear where someone is a day - or an hour - late on a payment and the rate goes from 1.99% to 29.99%?
How often have we read where someone's Citibank rate goes up because they were late on a payment on their BofA card?
Lenders will reset rates for the tiniest of infractions, and they will take the rates as high as they can.
Let me add this: it's not always easy to find the fine print. I've written about the fine print before. Let me say that it wasn't always easy to ferret out the meaning of some of the terms.
http://www.creditmattersblog.com/search/label/dissecting%20card%20agreement
The problem is that there is an evolutionary trait that leads us to the normal problems with "keeping up with the Joneses"
The banks are merely exploiting these psychological tendencies to the fullest. That's the way that most scams work. Scams win with psychological appeal. These traits lead to many other problems, such as when we don't get out due to remorse over money already lost (in it for the long haul).
Consumer protections basically try to reduce exploitation of these traits. Some people have a reduced level of affection, but many are still easily manipulated. It's funny how those that have the most problems are most against regulation. They may enjoy being manipulated, or it could be that those around them have manipulated them to think manipulation is a positive.
Harry, other than the idea of the terms being in "plain sight" I completely agree.
I think there needs to be two little regulations in place that could potentially solve this whole mess.
1. Before you get credit you must take a little course (that credit card companies fund, naturally) that educates you about the proper use of credit (a consumer advocate should naturally create and run the course - NOT credit card companies).
2. Terms and conditions must be in PLAIN English that the AVERAGE American can easily read and comprehend without the need of a dictionary and a law degree.
You end up with educated consumers who wont take as much crap.
Lion, I would be happy to host the course right here at CreditMattersBlog.com. Ha!
CreditMattersBlog.com said...
But we can't have too many people paying in full, Jake. If everyone paid in full, there would be no reason to have BT deals -- and life-of-the-balance deals.
January 12, 2009 11:57:00 AM EST
Maybe it will be just the opposite. Companies may be forced to make offers where taking on debt makes to those who normally PIF.
The Atlanta Journal-Constitution is on a roll. Lots of credit related articles from them lately!
I've skimmed through the article and I can only wonder the following:
IF the majority of the consumers have consciously rejected some of those blatantly unfair clauses, would the credit card system as we know it today still exist?
All just a hypothetical point, but most likely not!
Those of us exploiting the "loopholes" (e.g.: mercilessly utilizing the grace period to effectively get a ~20 day interest free loan plus incentives) wouldn't even have the opportunity to begin with.
Remember that the ultimate maxim for financial institutions is to turn a profit. Most banks ultimately aim to turn a profit for their stockholders and executives. While profits earned by credit unions may not ultimately find their way into a hegemonious group, they still have to earn a profit in order to lend and fund their operations.
---
With that said... Marcus, are the credit card issuers required by law to provide grace periods? Or are they offering that to "save face"?
Azntg, grace periods are based on federal regulation. I am in class right now, so I don't have easy access to the regs. But it's 14 days (though there is some debate about whether it is actually longer).
Here is a link to Credit Slips.
http://www.creditslips.org/creditslips/2008/10/residual-intere.html#comment-136383239
Appreciate the feedback. Just a couple of comments:
- Concerning the idea of "attractive terms because I carry no balances". I don't think it's as draconian a situation as that. It is important to keep utilization low (no card above 30% is good for that, although it's nice to be below 10% overall).
I have very substantial credit card balances outstanding. These are balances that reasonably would be sitting on my HELOC, but I'm a fool to pass up 0%. Outside my promo bt, I occasionally hold a balance for a couple of months, though I largely PIF.
- Re "obscured terms" and "fine print": My wife just got a new card from BA. Now, I'll grant you that a 40 page agreement (small pages, mind you) might be a little daunting. But it's split into 10 sections by title on the cover, one of which is "We May Amend This Agreement".
Turn to that section and sentence two is, "We may increase or decrease any or all of your APRs"
Now, I realize that people open appliances all the time and put them to use without taking even a cursory glance at the user manual. If they slice their thumb off, who should be reasonably be held as primarily liable (assuming there's nothing defective in the equipment itself)?
I see plenty of people ignore stop lights, or seem challenged in the use of their turn signals to communicate a lane change. Please don't ask me to fault the respective manufacturers.
I'll admit, however, that given the nature of some people, it's worthy to put that plain language statement re rates from the agreement smack dab on the front of the card enclosure. (Of course, you can count on some people ignoring that, just like the stop light.) Make this a requirement, if you will. Just don't tell me that there's something underhanded in the current disclosure.
I've heard from enough readers to know what's going on. Too few people READ these card agreements. When something goes wrong, then they turn to the document. But not before.
Do you know how many people may not know what the word "amend" means?
Why not just say "we can change this agreement at any time with or without your approval"
Plain english.
The fact that it is daunting is what those companies count on. They know people will be intimidated and NOT read them. And comparing it to a owner's manual for an appliance is silly. Your house will not crumble to the ground if you misuse your toaster. Your financial life however, can fall like a ton of bricks if you misuse your credit cards because you were too scared to read that kind of daunting agreement language.
The card disclosures ARE underhanded. Stop signs are big and red and right in your line of sight. You choose to ignore them? Your fault. The city isn't trying to get you to ignore them. Ask any (honest) bank and they will tell you that it is in their best interest to have uneducated consumers.
Put it this way: If someone with no financial education or knowledge and only a high school level vocabulary cannot understand it - it is too complicated.
Don't fool yourself- fees make up 50% of the average CC issuer's revenues. Interest + transaction fees together add up to the other 50%.
Anything that might cut into those fees is going to be met with scary sounding hogwash, lol. oOOo your rates will go up. Looks like they are anyway, no?
The enactment of the FDCPA and the FCRA in the '70s was supposed to be the death of lending as we knew it. Same with the FCBA and the ECOA. Instead it has grown by many magnitudes.
Asking lender's opinions of this legislation is like asking a prison population if they are really guilty, lol. Of course none of them are. Felons always tell the truth ;)
Rad, I think I've found someone even more skeptical than myself. Ha!
I said HONEST
haha
Hehe.
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