Credit-card issuers are easy targets these days; everyone is taking a whack at them. Sure, they've done some sleazy things, which warrants some of the new legislation that's being implemented, but some of the things that consumers -- and politicians -- have railed against miss the mark. Instead of vilifying card issuers for raising rates and slashing limits, Americans should be applauding. So says the Los Angeles Times.
From the story:The real scandal, according to the common refrain, is that issuers such as American Express, Citigroup and Bank of America have received billions of bailout dollars from taxpayers. How dare they repay the favor by putting the squeeze on us?
This is where populism shades into demagoguery. Critics who argue that it's inappropriate for bailed-out banks to tighten credit terms on taxpayers have it exactly wrong: If we're footing the bill, we should praise these banks for being stingy with credit, not hammer them for it. It won't be any easier for them to pay us back if we hector them into maintaining the loose standards that produced this mess.
Have fun with the rest of the story. There are plenty of paragraphs left to chew on. Read them here.
Monday, May 4, 2009
Credit Card Companies As Evil Villains? It's Not That Simple
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"They remind me of some frat guys at my college who were guilty of only about half the things they were accused of, but what was true was bad enough. From them I learned this tenet of the court of public opinion: Once you've been caught firing guns at African American students from the frat house roof, no one will believe you're innocent of anything"
What frat house is this?
"What about the claim that the issuers are perversely cutting limits for their highest-scoring, or safest, customers? It's true but misleading. Fair Isaac Corp., which invented the FICO score, found that of the 16% of consumers whose limits were cut between last April and October, two-thirds weren't guilty of any late payment or other "risk trigger."
Oh, the name of the frat house is AmEx.
Not sure which frat house it was but I found that to be an interesting paragraph.
Not Sigma Chi!
~Don
: )
What does :) mean?
~Don
That's a smile. Sideways.
My job requires me to maintain a cordial relationship with one of the major credit card companies and I get to see - on a daily basis - the kind of customer feedback that flows back to the credit card company. I think it's very telling how much people writing to complain about interest rate jack-ups and all that seem to forget that credit is not a right, it's a privilege, and the risk when it comes to credit cards is almost entirely on the card company.
I don't disagree with the idea that retroactive changes to agreements are evil and wrong, however, I do disagree - strongly - with the idea that a credit line decrease is some affront to all humanity. There are times in history where we can all look back and ponder what the hell were they thinking, and I think that issuing unsecured credit in excess of 5% of a persons gross annual income is going to be seen for the insanity that it is.
I don't have much issue with general tightening of standards, but the problem comes when the tightening relabels cardholders as high risk. I have never had a late payment. Many of my lines have been cut down, throwing my utilization ratios from well under 50% to over 90%. Once an issuer does that, another sees that I'm using 90% of my credit limit (never mind that the balance is the same or lower, now), and trims my limit with them. Snowball. I'm high risk. Time to start taking rates from single digits to within 3% of default. I've still never been late, pay more than minimums, etc. I did nothing but pay down my balances (on time) and have been rewarded with sometimes near tripling rates (not from promos, either). The same banks are willing to pay upwards of 0.15% for my deposits, though. Sometimes more than 0.7% for a short term CD.
Let me play devil's advocate here for a moment.
Remember when card issuers used to issue those huge credit limits? They were outsized and we knew it. In that case, we were being helped by these limits -- because it would make our utilization ratios look excellent (even if we were utilizing a fair amount of the limit). As far as I can tell, none of us were complaining back then.
Now, however, the card issuers are reining in those credit limits. Those with balances are now getting pinched -- because it makes the utilization ratio look much higher.
It's a two-way street, no? Great for the consumer when limits were high -- and not so good when limits are being brought down.
Just throwing that out there.
Yeah, my credit limits equal 125% of my annual gross income. If I owed that much I would be in deep trouble.
Also, that we now "own" the banks is reason to ask them to reduce their exposure, not compel them to keep their risks high. Forcing them to leave themselves open to increased risk is one reason politics is not a good way to run a business.
They want applause?
*golf clap*
Surprise you didn't do a one-handed clap, Drew. Ha!
I have a question for you. I am kind of new to the whole CC usage and I am not sure if a similar question has been answered already somewhere on this blog, so sorry for any recurrence. I use my visa card just for groceries and gas and pay it of right away after the balance appears on the account. Is that good or bad? What could that mean in regards to a potential increase of my flexible rate currently at 9.9%?
I'm not mad at banks for cutting back on credit lines. It needed to be done relative to the economy we are now in.
What I'm mad at them for is tactics that would make Tony Soprano blush with regards to fees, interest rates, and collections.
At least with Tony, you know you're getting your knees capped if you don't pay on time, he doesn't bury it in fine print. I also doubt that Tony would change the interest rate retroactively or rate jack you because you were late on your gas bill. He might call you to collect on your dead mother's debt, but at least he'll be sympathetic about it.
Seriously, it took me three sentences to make Tony Soprano look like a good guy compared to the credit card industry. I can live with them having the title "Evil Villain"
Anon, you don't need to worry if you always pay in full, the interest will never affect you. The CC companies have already shown that prudent spending and payment habits are no factor in a rate increase.
Thanks Drewbert. So I am good then and shouldn't worry about my FICO score either? I actually don't know my score and as I could read in previous comments, that score will just matter in case I would apply for any loans.
While I won't say you should ignore your FICOs, don't worry about them either. Know what they are just to have an idea. Plan out any purchase large enough to require a loan. Know your score ahead of time. If you're new to having lines of credit, you just need to concern yourself with building up a history. That isn't anything you can rush unless you are H.G. Wells.
Practice Prudent Payments and you'll be just fine.
I have to admit that I don't pay very much attention to politics. At the risk of sounding like a dumbass: am I confused? The banks got their bailout money from us (taxpayers), right? And now to pay that back, they are increasing our rates and fees, right? So... as a taxpayer and a person with cc debt, I am paying twice.
@Anonymous May 4, 2009 11:25:00 AM EDT
So, I have to ask...why did you use credit?
I just took a look at my available credit as a % of my gross, and I don't know how to factor in Amex (no limit), but for the one revolving account I have, it's 12.5% of my gross income - and that's after I DECLINED the absurd limit they first offered me - 55% of my gross.
My monthly utilization of that account is under 2.5% of the limit, no balance carried, because that's what I can pay off every month.
And you know what? This month I really, really, really want to buy some home repair supplies for my hideously ugly bathroom, but we can't afford to buy them without dipping into savings or carrying a balance. There it is in stark relief: You can't really afford it if you need to carry debt to buy it. Performing assets excepted.
Maybe CM or one of the other experts here can enlighten me.
Don't the CC companies realize they are helping to cause these defaults by acting in this fashion? Someone who is already struggling and misses a payment can see his 9.9% interest rate go to 30%. Where that person had a hope of getting out of debt at 9.9%, there is no chance at 29.99% and that person is now on the phone to 1-800-Bankrupt
Drew, I talked to an analyst who covers the card industry. He told me that the card issuers know that some will default. No doubt about it. But they run the numbers across a big group of customers who get hiked. The payoff works in favor of the card issuers -- even though some will no doubt head to 1-800-Bankrupt.
The card issuers have crunched the numbers.
South Texas yes you are paying twice. Even worse is now that you "own" the banks you are supposed to cheer when they take excessive profits because you are an owner......it's just too bad you are also a customer.
...interesting use of analogies there. I especially liked the frat house paragraph....
Look, I understand scaling back limits. They got too high to begin with. I even understand raising rates on "at risk" customers. What I don't understand is raising rates as high as they did (29.99%) anyone for seemingly no reason and on their best customers! Or their timely limit lowering so people go over the limit (wait until they charge $5,000 and then lower the limit to $4,000).
I have seen all of this with friends and family in recent months. It is just BS. Don't worry, I have been tracking the worst offenders - I will remember them when times get better and they seek my business.
and another thing. Isn't it ironic that we HAD to bail the banks out to "keep credit flowing" but now that we bailed them out writers like this guy think they should not lend money because that's prudent. The hypocracy can make your head explode.
High limits are good for everyone.
People can make a large purchase and plan to pay it off over time.
Banks make money off interest. Banks make a profit.
Everyone wins.
don't bail out banks with tax payer money, lower my taxes, and then I won't have to borrow so much in the first place.
I disagree that if you use credit responsibly the credit limig cuts won't hurt you. What if the only revolving debt I have is my home equity line (which mind you is on a secured asset) However, the cut in limits to my credit cards that I do not use or rarely use effects my FICO score in a severly negative fashion. Now it is true I don't need any loans other than the one against my house mentioned, but my over all debt load is now HIGHER as a percentage, and my FICO score goes DOWN...now my cost for car insurance and everything eles goes UP. Nothing wrong on my part, execpt that I chose to do business with a weak bank like Bank of America that need to slash my card limits based on no action whatsoever on my part.
Anon, your utilization is only computed on your revolving credit. Not on home equity, car, mortgage or personal loans. Your score is not affected.
Frank, I appreciate your take on that but Bank of America and Citibank did just that rececntly and stated I was over 50% on two credit card credit lines that only had about 1,500 out of 30,000 used. They said but you also have 35,000 of 40,000 being used with another company (my home equity line) which I explained it was, and they said "on your credit report that is revolving debt" so they used it to cut back my credit lines to total of about $12,000. Two things to learn from this (1) If B.O.A. and Citi do that, I have little trouble believing FICO does it also (2) Even if I paid in full with no balances, my home loan would be part of my utilization by their standrds.
I am not sure that we want to finance the capitalization of the banking system on the backs of consumers who happen to have credit card balances. Our financing measures of the banks should be assessed and chosen less arbitrarily. My guess is that a personal income tax on high earners, who tend to disproportionately benefit from the financial system, and hence its rescue, would be more fair than allowing CC companies to exploit consumers through poorly regulated financial products. The logic that we should support bad business practices in order to support government revenue is a path that we don't want to enter at the moment. What's next- taxing all cars except for Chryslers?
Anon, You are right, there is a special way that FICO handles home equity balances above a certain amount. I forgot exactly what happens, it could be that lines above a certain amount are considered revolving. I think it is 30K. Hopefully someone knows for sure?
Anon 9:16 I don't think that CC companies should finance their capitalization on the backs of credit card consumers, and I don't think they are either.
I think that the CC division are in trouble on their own, and they would be doing much the same thing even without the bailout. CC customers are much more likely to in default now and they have to make some adjustments. I don't think they should be allowed to raise prior balances, but future balances seems fair to me, as long when I charge something I know what my rate WILL be.
As I said before my credit limit is 125% of my annual income. Much to much. They do have a right to cut their risk.
Banks rely to heavily on FICO, they should add common sense back into the equation.
One issue I have with FICO is: There is a circular reference when the FICO is supposed to measure your credit worthiness, and its decrease automatically spurs future decreases. I was always told that circular references are errors! I guess not for FICO.
If you want to consider the broader socioeconomic and political context, you have to consider the possibility that consumer credit (credit cards and home equity lines) have been used in the last couple of decades to "paper over" the stagnation in growth of real wages.
Robert Reich has spoken to this to some extent. Now that the credit bubble has popped, there is much gnashing of teeth, and no one is quite sure whom to blame. Consumers like to villify evil credit card companies, but they have a codependent relationship with them (broadly speaking) in order to maintain their standard of living.
The truly unrealistic sense of entitlement has to do with Americans' standard of living, not with credit per se. Consumer credit was just the last thread allowing them to hang on, with the economy and industrial base having been hollowed out so thoroughly...
Frank, I think that HELOCs above $50,000 are ignored. TimothyPHX knows the answer definitively. But I believe it's $50K.
Pete you hit the nail on the head, I think we never really recovered from 9/11, it has all been imaginary- based on inflated home values and credit usage.
I got in credit card debt due to career issues. My debt concerns me. I know so many other people who spent themselves to the same debt level I am at, and they didn't see any problem with it at all. They were taking vacation, had super nice cars and partied the weekends away having nice dinners. We can be mad at the credit card companies(they do have some blame here) however, we have to blame ourselves first. We should have reined ourselves in, now the banks are doing it for us. In the long run a good thing.
"I think that issuing unsecured credit in excess of 5% of a persons gross annual income is going to be seen for the insanity that it is."
Only 5%? Someone with an income of $100,000 can handle more than a $5,000 credit limit. They are also likely to spend more than that now and than on something like a vacation.
"t's a two-way street, no? Great for the consumer when limits were high -- and not so good when limits are being brought down."
In most cases it just seems people are pissed that their true credit scores are starting to show. Utilization as a measure of credit risk only makes sense under the assumption that your credit limits are reasonably tied to your income. A guy making $70k a year with $30k in debt with 30% utilization more than likely a greater credit risk than the guy making $70k with $10k in debt with 60% utilization.
Carnap / Frank:
Aren't the credit reporting bureaus barred from collecting information on personal income? I think some of the silliness with FICO scores comes from the fact that they can't take into account so meaningful a factor in creditworthiness as income.
Of course, lenders can request that information when underwriting a loan, but for unsecured credit they don't seem to verify that information -- at least in my experience.
I went to a seminar on credit scores once, and the presenter defined the FICO score as something like this: a rating of the likely-hood that someone would be over 90 days late within one year on a payment. They are basing your future performance based on your history.
But FICO was not designed even by them to be the sole decision maker, only one decision maker.It is the banks job to analyze your past performance(FICO), job stability and income. To see if the loan makes sense. Many banks and mortgage companies focused on FICO too strongly. I think it was cheaper for them to do so.
As a mortgage broker, I often saw how one or two FICO points would be the end all or be all of a loan. Clients would often have to take some action to tweak their score or pay a higher rate because of these points. The actions would never have changed their future performance on paying of the mortgage. It was a bastardization of the process. And covered the underwriter's decision making. It also allowed the loans to be categorized a certain way for securitization.
Banks should be looking at the total picture and now that FICO's are being effected by utilization, they need to take that into account. It might be that FICO's were inflated due to the increased CL too, so now they will be more accurate?
The banks initially use reported income and score, but then just use score and internal performance, some ask for income when granting a CL increase, but most don't verify. We all know how stated income mortgages went.
Over a year ago I read in the the Wall Street Journal that FICO scores were not accurate in predicting defaults on mortgages. I thought that banks might change thier reliance on scores to make a decision.
Frank, this isn't from WSJ, but I found it interesting:
FICO - The Late, Great Credit Score?
http://www.lendingsanity.com/index.php?option=com_mojo&Itemid=89&p=18
And if anyone is really bored, there is this:
Did Securitization Lead to Lax Screening? Evidence
From Subprime Loans
http://siteresources.worldbank.org/INTFR/Resources/VigSecuritize0808.pdf
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