The End of Universal Default?
| Tue May. 12, 2009 7:43 PM PDT
I forgot to blog about this earlier, but here's the latest news on Chris Dodd's bill to bring a little common sense to the credit card industry:
Dodd's original bill had sought to ban all interest rate increases on existing balances.
Under the compromise measure, agreed to over the weekend by Dodd and Sen. Richard C. Shelby (R-Ala.), card issuers would be allowed to retroactively bump up rates for any borrower at least 60 days behind on payments. However, if the borrower subsequently paid on time for six months, the card issuer would have to restore the original rate.
The bill also would prohibit card issuers from increasing rates during the first year a credit card account was opened and would require them to get a customer's permission to process transactions that would push the account balance over the credit limit. Another provision would require card issuers to post credit card agreements online.
It's good to see that the credit card industry still has a friend in Richard Shelby. We certainly wouldn't want to pass a law that completely prevents a company from retroactively raising the interest rate on a loan it's already made, would we?
Eh. At least it's something. Presumably this means that credit card companies can no longer retroactively increase your rates just because you were a few days late paying your water bill, either. Though I think I'd want to read the fine print before I was sure of that.
In any case, now it's time to see if any Republicans will vote for this bill. They might! Constituents are pissed at credit card companies, after all. In the past Republicans could prevent bills like this from even coming to a vote, but now that they're going to be forced to take a public position they just might decide that discretion is the better part of valor. Cozying up to your finance industry pals is one thing, but losing your seat over it is quite another.
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Comments
In business, it's common for
Submitted by trotsky (not verified) on Tue May. 12, 2009 10:05 PM PDT.
In business, it's common for banks to require borrowers to maintain certain standards of creditworthiness, and to call loans when those standards aren't met, even when the borrower has never had a late payment on the particular loan. It is a routine credit-management tool, with the goal to head off bad debts before they balloon.
What is wrong with using similar policies in the consumer market, so long as the rules are disclosed? Every credit card I've ever had has included fine print that the rates can be raised dramatically for pretty much any reason at all. Once, when I was a bad boy, Citibank even followed through. I've never done business with them again -- even though they want my trade now -- but they didn't do anything they didn't say they'd do.
I've got to say, if people are ticked at their credit-card lenders, paying off the cards and not using them anymore is a fine solution.
A "fine solution" trotsky ?
Submitted by fedupski (not verified) on Thu May. 14, 2009 2:08 PM PDT.
Yeah, love it or leave it, that's a fine solution if you don't care about ever renting a hotel room, buying a car, or getting a decent mortgage!
These corporate bullies run more than just our interest rates, they've bought and paid for our Congressional "representation"!
I honestly thought they would have rigged a closer vote, there's not enough pride left in Washington anymore to even try to hide their lack of concern for the taxpayers!
>>In business, it's common
Submitted by Anonymous (not verified) on Sat May. 16, 2009 5:55 AM PDT.
>>In business, it's common for banks to require borrowers to
>>maintain certain standards of creditworthiness
Those are usually arms-length transactions between two sophisticated parties, each represented by $500-$1000/hr. attorneys.
Precisely
Submitted by The Lounsbury (not verified) on Wed May. 13, 2009 12:33 AM PDT.
Essentially Americans are terribly spoiled. They want low cost easy credit, but no discipline. Unsecured lending is hardly a right and to repeat the above if people are ticked at their credit-card lenders, paying off the cards and not using them anymore is a fine solution.
Well, I'd agree with the two
Submitted by Anonymous (not verified) on Wed May. 13, 2009 1:09 AM PDT.
Well, I'd agree with the two posts above, except for one tiny circumstance. I'm one of those crazy people who read the fine print, and google the terms if I don't understand. I thought I knew what to expect, until I once lost a chunk of cash because the blue moon hit while Mars was shadowing The North Star which had I read about in clause 13A3c4II, stipulating that the bank keeps my money. I did read it, but I failed to see that the moon, indeed, was blue that day.
That's not business, it's just sleaze. The "one time charge" amounted to about 60% APR on the amount in question.
And try to travel for business without a CC. I don't think you'd want to, even if you could.
There seems to be real needs
Submitted by The Lounsbury (not verified) on Wed May. 13, 2009 4:06 AM PDT.
in terms of reform of practice, if I understand US practises in credit cards, but the items Drum is focusing on do not seem to me unreasonable - this is classic conservative underwriting on credit. When other credit starts going bad, the Interest Rate goes up, as the Interest Rate is pricing the risk. Now, the debtor should have an exit option, and as well it should be clear that there is a real credit issue (i.e. a late bill pay may simply be an oversight, but a pattern of late bill pays is usually a sign of stress and declining quality).
Here again, Drum is arguing on one hand for more conservative credit underwriting, but is unhappy with the reality of conservative practises.
That being said, abuses such as abusive fee application and gaming the payment cycle are something that can and should be addressed. Of course one should be sure it is a real prevalent issue (credit card holders are in general hypocrites in complaining in my experience)
Credit Card Holders are hypocrites?
Submitted by Godless Heathen at work (not verified) on Wed May. 13, 2009 5:11 AM PDT.
You mean anyone who wants to be able to rent a car, buy a house, travel by airplane, use the internet to find goods and services? That's a whole hell of a lot of hypocrites.
You make the correct point, however, that risk truly needs to be established before rates change. I was up until recently a perfect example of what Drum is talking about. Skip the next paragraph if you don't want the boring story, I'll parse out the conclusion into a final paragraph.
I was a dumb college kid with a new address every two months and some at-the-time unavoidable living expenses on two credit cards. I forgot to update the address on the Discover, and ended up 60 days delinquent. Discover raised my rate from 9.9% to 29.9% (that on its own should be illegal). I understood their reasoning in the decision, and I worked hard to pay that card down. Our friends at Citi decided they also needed a piece of the pie, and raised my rate from 11.9% to 26.9% even though I had paid more than double the minimum payment every month since I first had a balance on the card (a period of more than one year). When I called to explain the situation that I wasn't having money problems but just organizational issues, they replied that they would be happy to reduce my rate after the Discover account had been returned to good standing and paid for 9 consecutive months. After this punitive period, they reduced my rate from 26.9% to 18.9%. In the mean-time, I had graduated from college and found gainful employment (something that should have reduced my credit risk to below what it was prior to my default). It took another two years to get the rate back down to 11.9%
After three years of timely payment and continued accumulation of wealth (albeit a modest amount, the point is that my creditworthiness is getting better, not worse), I received a form letter that said my rate would be increasing from 11.9 to 19.9 because of the prevailing economic conditions. It didn't seem like a big deal because now I rarely use my cards (still working on that college debt) and the higher rate would just be more disincentive to spend. Then the first bill came and I saw that they were charging the same 19.9 on my standing balance. That was the final straw. I finally heeded the advice of a colleague and I couldn't be happier.
The advice? GO TO YOUR LOCAL CREDIT UNION. My CU offered me a consolidation loan at 9.65% fixed. My debt will be paid off a whole year earlier (I took a cash advance on my Union card to help my Dad out of a jam but it was costing almost 15%), and I don't have to worry about ridiculous rules. The bank manager walked me through the entire contract and we even discussed terms like penalties and rate changes. There is no universal default on my loan. So long as the loan is in good standing, the rate is fixed at 9.65. Also, my CU offers free insurance on the loan that provides two months gap coverage if something happens to my income (disability or layoff).
If Citi wants to dress up and play investment bank, let them. I just won't let them do it with my money.
Yes, most credit card complaints are hypocritical
Submitted by The Lounsbury (not verified) on Wed May. 13, 2009 12:40 PM PDT.
I hold several credit cards, and in fact I still hold a couple American issued credit cards (they never caught on that I am no longer resident and haven't been for a decade, would be bloody damned surprised if I suddenly went on a binge and defaulted).
Most people are financially illiterate, and hypocritically want contradictory things - even if "common sense" (if one is not in a populist pandering mood as Drum is - either out of ignorance or sheer pig-headedness) says they do not go together.
I really don't have any sympathy, most of the world, even middle-income nations would love to have the kinds of facilities Americans enjoy for getting credit at (relative to risk) highly competitive rates. It amuses me to see the howling about this. Whether that access is a long-term good thing is perhaps another question.
As for the "Credit Union" advice.....
It is naive. Credit Unions scale very poorly, and are a niche solution, not a mass solution. I have nothing against credit unions, but as they scale up, they take on the aspects of the very banks you hate, and often less efficiently. And a fractured mass of small banks for a huge economy is also not terribly efficient either. Illiterate fetishisation of such things is not a solution to your problems and more likely to ruin the fetishised object than solve anything - I say this based on seeing this in other markets (e.g. in trying to scale up micro credit, which is not in reality as sexy as that Grameen Bank pimp makes it). But I rather expect irrational responses of Leftist populist rage rather than considered thought
Where are the RICO police
Submitted by Anonymous (not verified) on Wed May. 13, 2009 2:42 AM PDT.
Where are the RICO police when we need them?
Old Farmer's advice:
Never borrow money to buy something unless that thing makes you money.
If Kevin Drum really cared
Submitted by Jay (not verified) on Wed May. 13, 2009 2:55 AM PDT.
If Kevin Drum really cared about people being "taken advantage of" by the credit card companies he would get off his lazy ass and start a profitable business based on his standards.
Alas, democrats don't start businesses. They just complain to their congress critters to write laws, as this keeps lobbyists employed.
Credit Card Regulation
Submitted by Jim Pharo (not verified) on Wed May. 13, 2009 3:04 AM PDT.
Dodd's bill is a classic example of pissing in the wind. Even if it passes (which it may well not), it won't take long for credit card companies to devise new ways to soak their customers without running afoul of the law.
The problem is the approach of trying to pass a new couple of rules once every half decade. Credit card companies have enormous leverage over their customers, and will use that leverage in ever more imaginative ways to maximize the financial rewards to their shareholders.
The key is to "make work pay." To undercut credit card companies' leverage, consumers need to make more money and be better able to afford a reasonable lifestyle. Otherwise, regulating credit cards is like pushing peas around on your plate.
Re: Universal Default
Submitted by UglyMoe on Wed May. 13, 2009 3:29 AM PDT.
Does it make sense to raise costs on a customer that is already defaulting?
Why don't credit card companies cut off the credit, plop a reasonable fee on the debt, and then require the customer to pay that down to 80% of the original credit limit?
If one assumes such a situation prevents the customer from obtaining any more credit cards, then that is all the incentive necessary for him to act isn't it?
The CC industry is
Submitted by Anonymous (not verified) on Wed May. 13, 2009 4:49 AM PDT.
The CC industry is predatory, and has done far worse than any of its cardholders. Most of us know that. To the others: if you want any kind of economic recovery in your lifetime, you'd better hope that these modest reforms (themselves inadequate) do some good. Otherwise, get into that gated community while you can. And invest in the pitchfork industry - it will be booming.
symbols of the class war.
Submitted by Godless Heathen at work (not verified) on Wed May. 13, 2009 5:15 AM PDT.
"Otherwise, get into that gated community while you can"
If you are planning on a populist uprising, gated communities are pretty far up the list of places not to be in. Basically, any scenario in which there is a literal physical wall built between rich people and poor people, I would try to stay on the poor side (if you really think Americans will ever get off their asses and actually do something about it. I'm of the opinion that as long as McDonalds is affordable, the people will suffer through complacently)
How about making the
Submitted by felinecannonball on Wed May. 13, 2009 5:41 AM PDT.
How about making the postmark define payment dates and having them immediately process electronic transactions and give you an electronic receipt.
Seriously, that would deprive them of about 5 billion in fees.
Thoughts
Submitted by Art Eclectic on Wed May. 13, 2009 6:37 AM PDT.
While I have to agree with Lounsbury (Mercury must be in retrograde or something) about the hypocrisy, Credit Cards are payday lenders for the middle class - know who you are dealing with. Godless Heathen is also correct in that our modern world has made it extremely difficult to live without credit cards. Try buying an airline ticket or anything off the internet. Renting a car is impossible. Although, there is always good old American Express for those. Pay it off at the end of the month and no interest/fees.
So, the hypocrisy is people expecting to use payday lenders (Visa, Mastercard) to spend beyond their means and they expect those lenders to be anything but sleazy payday lenders.
Of course I am to be agreed with
Submitted by The Lounsbury (not verified) on Wed May. 13, 2009 12:49 PM PDT.
Sleazy, maybe on the bottom end. However, in reality if one is a disciplined user of credit and not using it to leave beyond current income, credit cards are a positive bargain. You bloody idiots need to be shipped off for a few years where such facilities do not exist and see the advantage of credit cards.
The disciplined user of credit cards never pays much in fees, and gets FREE access to 20 -30 days of float. That is better than many small corporates.
Republican votes
Submitted by matt (not verified) on Wed May. 13, 2009 7:00 AM PDT.
I think the GOP is already plotting their course: buried in the CNN Story on Aaron Shock was this nugget:
"Schock's focus is squarely on the Republican agenda: cutting taxes, slashing the deficit and pushing through credit card reform. He has also taken a traditionally conservative stance of opposing abortion and same-sex marriage."
Credit card reform is part of the GOP agenda? Did I miss something?
Jay: Alas, democrats don't
Submitted by alex (not verified) on Wed May. 13, 2009 8:13 AM PDT.
Jay: Alas, democrats don't start businesses.
That must explain the overwhelming support for Obama in Silicon Valley. Nobody there ever starts a business.
Problem is resolving
Submitted by House Whisperer on Wed May. 13, 2009 8:15 AM PDT.
I think after the great recession, it will once again be embarrassing to be in debt.
I'm a demmicrat and own not
Submitted by Mr. E Hole (not verified) on Wed May. 13, 2009 8:25 AM PDT.
I'm a demmicrat and own not one, but two businesses.
I got around the credit card trap by making amex my only card. It has to be paid off every month, helps me keep a high credit rating, and I have a card to use for anything I need a card for like air travel. If they don't take amex I use my bank card which can be used like a mastercard but takes the money from checking.
This may not work for everyone, but it has worked well for me for several years now.
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