Credit Card Reform Stinks for Responsible Consumers (aka "Deadbeats")
When the Senate passed the "Credit Card Accountability Responsibility and Disclosure Act" by a 90-5 margin yesterday, I thought "Guess who's going to get screwed again? Responsible people who pay their bills on time!"
Don't get me wrong -- I think it's a great idea to make the credit card companies accountable for their sneaky ways, but this legislation is likely to cost card issuers $12 billion a year in lost fees and income. To replace that revenue, don't be surprised if firms find other ways to recoup that money.
On "The CBS Early Show" this morning, I outlined the ways that consumers who routinely pay off credit card balances -- also called "deadbeats" by the card companies, because they can't make money on us -- might end up paying more for the privilege of credit.
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What is shocking to me is that this new credit card revision does little for the consumer. A grace period of 45 days, please, most people get paid every 30 days, what nonsense the 45 days are.
And if the credit card companies want a fee for using their card, well, then, I will cancel mine.
I can live without a credit card.
Boy, do you live in a bubble. Let's say your health insurance would cost $8500 a year, so you can't afford it. You need treatment, so you use your card, and even though you can't pay the whole thing off at one time, you do make regular payments. Even so, the CC company raises your interest rates to 30% ANYWAY so that it takes even longer to pay medical charges. That makes you a burden to those who have enough money to pay off their full balances every time they make a charge? Really? The problem is the CC companies, not consumers, and I include those who used their cards for more frivolous things. Usury is usury whether the loan was for a heart transplant or a pair of designer shoes.
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While there are certainly cases of hardship, do you really think that those are the majority of folks who are in trouble with their cards? I know from personal experience from my former career as an investment adviser, that plenty of people came in with huge credit card balances due to their own imprudent behavior. The example you raised is more emblematic of why the change in bankruptcy law was horrible.
So tell me Ms. Schlesinger, does it have to be the "Majority" of card holders not being in trouble to be wrong? What if credit card companies had a VIP list like the credit reporting industry does? Doesn't this make the playing field less level? So you're saying that as long as 51% of people are not being ripped off by the credit card industry everything is OK? I think that is short sighted and ignores the abundant evidence that the credit card companies are gaming the system.
Not everyone who is in trouble with credit cards is an irrisponsible consumer. Don't you read the news as well as write it? You make a prospective argument laying down rules that have no basis in reality then go on to argue that people who don't follow those rules are the problem? Credit card companies have been clearly a danger to the average consumer.
There is a lot of precident for this in laws that have been repealed as well as law suits by state attorneys general against the credit card companies that have been "Pre-empted" by the Supreme Court of the US to illustrate what these tactics are. Wake up, credit card companies are the problem. Consumers need protection from them. Over the last 15 years credit card companies have been allowed to regulate themselves and these are the rules they have decided are are good for everyone. I disagree with them. So should you.
That is a little to close to saying, "Well, you bought a BMW so you should expect it to be stolen." Usury is usury and applying it to ANYBODY is wrong and criminal.
I'm sorry. Not rewarding a behavior is NOT punishment.
"Deadbeat" credit card customers will likely have to pay the minimal fees any customer should to receive a service. A credit card IS a service, not a privelege or a right. And they will likely get to keep that privelege, as opposed to many marginal customers who will not.
I apologize, I should research before I speak. Merchants pay credit cards 2% of all purchases made with plastic:
http://money.cnn.com/2008/07/28/news/credit_card_interchange/index.htm
Merchants then increase costs on everyone to pay for these fees.
Credit card companies encourage people to use plastic with "cash back," etc. to get us to rack up these fees, which of course hurts the folks who pay with check or cash.
I guess I won't weep for the "deadbeats," sorry.
They already DO make money off of deadbeats who pay their card every month. They get a small percentage of every transaction that goes through. In fact, deadbeats are probably the only source of hard, actual profit (not "profits") they have because we actually pay that balance with real money. A fee that is charged but not paid is not a profit. It is the promise of a profit.
Unlike many other countries, the USA stopped being a cash based economy years ago. Instead, for most purchases (especially larger ones) we use checks, credit cards and debit cards. Each of these methods provides a level of convenience and safety that does not exist when using cash. However, each of them also requires the existence of a system for processing transactions. Thus, some fees to pay for maintaining those systems should be considered inevitable.
As for credit cards, it helps if people understand what they really represent. Each purchase made with a credit card actually represents an unsecured loan from the card issuer to the card user, even if that loan is outstanding only for the short period of time from the purchase until the next card payment is due. Therefore, "deadbeats" who pay the full balance each month are in fact enjoying an interest free loan from the time of purchase to the time of payment.
The real problem with credit cards is that too many banks and other card issuers have forgotten the most fundamental lesson regarding lending -- make sure that your borrower is a good credit risk. As with CDOs and other stupid investments, by issuing far to many cards and allowing credit limits to grow far too high in the hope of reaping ever greater profits from interest and fees, they have put themselves at risk of losing tremendous amounts of money when the card holders (borrowers) are unable to pay.
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Bless you--you hit the nail on the head: don't extend credit to people who can't pay and then be surprised when they...CAN'T PAY!
The "fee" for my debit card is the interest loss I take for keeping my account in the plus. That's a lot more money than it costs the bank to service my debit card.
No problem. I can do without credit card and I will if there will be a fee for not using it. I can do exactly the same with my debit card for commensurate cost.
There are some penalties or fees on debit card use that make it more beneficial to charge things than put them on the debit card. For example, if I travel out of the country, and put things on my debit card, I pay a 3% foreign transaction fee plus sometimes another ATM or debit fee plus sometimes an additional transaction fee, while one of my credit card simply charges a 1% transaction fee. So although I prefer to use my debit card for most things, I appreciate keeping a couple of credit cards for travel purposes!
issuing all that bad credit was their plan though. they knew what they were doing. how many people paid the minimum monthly for months/years until they defaulted? none of the credit card companies are going bankrupt because of high risk credit issuance.
meanwhile, they got everyone on board with dependency on plastic purchase habits. and every purchase made them money, because remember, their profit comes from the merchants per transactions.
so NOT sorry for "deadbeats". you've gotten all the breaks at our expense for years. you get the perks, you get the 0% car loans, so i have no sympathy for you now that you're starting to be treated the same way they've been treating us for years.
time to realize, you're not one of THEM, you're one of US.
I, a ten plus year customer of Capital One, with a near perfect record, just got a rate increase letter from them the other day. I transferred my balance to another card, and told Capital One to take their card and shove it up their a**.
They can't take advantage of you if you don't let them.
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I love your reaction...if they don't want you, I'm sure there are plenty of others who will!
Linda, I just did the same thing yesterday when I opened my Citicard statement. They've been moving around my due date as much as 5 days, so I inadvertently paid 1 day late last month (I've been early or on time since I opened it). they jacked me from 9% to 23%. I immediately started searching for another card with 0% for 12 mos and a fixed 7% after that. I was approved (I've got almost 800 credit score for cryin out loud), applied for the balance transfer all at once, and in about 2 weeks I'll be telling citibank to shove their card up their a**.
I think that if more card holders with good to excellent credit start doing this as soon as they see a rate increase, these card companies will start to rethink how they treat good paying customers. After all the ones with the good credit scores are the ones who CAN repay.
GOT MY notice yesterday. i will also be closing the accts and moving back to debit only, unless i get a card from my CU.
I got an offer from Capital One once, loudly touting their "no annual fee" policy. After having the card for one month, I got a bill with a $6 "monthly" fee instead! I immediately cancelled the card and won't ever touch Capital One again.
As long as there is competition, if you are willing to threaten a move to another company, you can almost always retain the initial interest offer. It's when the companies all collude in charging exhorbitant rates and unfairly charge late fees for their own delays, etc. that things get especially bad for us!
Credit card companies are seeing big increases in bad debt -- something like 8% of loans, if I recall correctly. I think they could get *more* profitable by cutting this down, by restricting credit to the bad credit risks, and not need to raise fees on anyone.
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True, but that will take time. Considering that these are publicly-traded companies, my guess is that they're going to look for quick ways to get some cash in the door.
There is a famous story of an insurance actuary who was brought in by a credit card company. He pointed out that by restricting credit to 10% of their customers they could reduce defaults by 90%.
The insurance company executive who brought him in reacted badly, noting that those 10% were responsible for 95% of their profits.
That is why they call the other 90% of us "deadbeats," for paying our balances and not paying interest.
ah, someone gets it. THEY LIKE THE SYSTEM, THEY CREATED IT FOR A REASON.
I find it interesting that everyone seems to call the money that credit card companies make "Profits". In a criminal organization they are called proceeds. For the criminals to say they will punish everyone if they don't get thier way is called "Protection" (oddly).
So, if credit card companies are going to lose customers who can't pay and then turn around and fleece customers who do, the credit card companies are essentially cutting thier own throats.
The better plan might be to try and reinstate customers whose credit ratings they have destroyed and treat all customers as customers rather than billing opportunities. This $12 billion that they are going "lose" are not profits. Credit card companies stopped making profits in 1996 when they started making more money in fees than interest.
The banking industry is demanding that they make up for that $12 billion loss. But what they really need to do is create a business model that doesn't depend on robbing thier customers. That's the real entraprenuial solution to the problem. What has happened in the last 15 years is that psychopaths have risen to the top of these companies who no longer understand business. That is what happens when laws and regulations are not enforced or repealed. A feeding frenzy begins and the most ruthless participants tend to win that game. When business is again practiced at these companies, that is when we will see real progress in the credit card industry.
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Fantastic way to look at it--the goal is not to destroy a business, but for the business to use this moment to recreate itself and become a going concern!
"The banking industry is demanding that they make up for that $12 billion loss. "
Because ever since the days of Regan, it has been instilled in the banking industry that greed is good. That the more money you make as a company, it's just good, good for the country, good for the employees who make minimum wage, it was patriotic to make gobs of money.
Our corporate mindset has steadily for the past 30 years focused on how much money they can make, how much they can keep and screw the little guy if he doesn't have the balls to reach as high as me!
This will never change. It's too ingrained in the gop mindset and in the corporate leaders and in our treasury. Had we gotten rid of all the heads of these companies like boa, citi, etc. when we gave them tarp money and then looked to the lower eschelons within the entities, we may have gotten a start to changing the mindset, however when none of that changed, there will be no change in business practices.
These are troubled times when we have to stop thinking about ourselves and think about the millions of families in desperate conditions.
I am willing to sacrifice on a few things or pay some more in taxes to help fix this current crisis.
I'm sorry your going to lose the free plane ticket to Saint Barts........
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I wouldn't cry for St Barth's (although I have never been), but you have to admit that there are plenty of credit card holders who dug their own grave on this. Not every single one of the 100 million who are late in their payments was "duped" by the card companies, right? Some were just living beyond their means.
well sure they were, the credit card companies begged them to!
Example number 1, go to any college campus and see what is placed on every flat surface and half the poster boards, credit card applications! Now, anyone with a teenage child or a young adult in your life can tell you what that means.
The credit card companies give money to people who they know will have trouble paying it back so they can rake in obscene profits.
Meanwhile, i notice you didn't respond to my comments.
Is there a reason you don't want to adknowledge that the credit card companies already make a good profit off of you and me and are not likely to drive us away?
Maybe you are not a dupe fooled by the credit card company rep lies, but are yourself a credit card company shill???
No business loses money on one customer and charges another extra to make it up, at least not intentionally and not for long.
But the credit card companies hope this blatent lie will get people to cry to congress about the reform law and give them cover to repeal it!
By buying into the LIE, you are only helping greed and the corruption of congress.
This is what hospitals and other health care entities have been doing for years - spreading the costs of treating the uninsured by raising rates for everything from a catscan to an asprin. Supermarkets raise the actual "cost" of their inventory to make up for shoplifters.
Ehhh, I don't believe the credit card companies' spin.
I realize you are repeating what the credit card companies' reps told you, assuming that those highly responsible, completely honest credit card companies would never lie to you, but...
I am pretty sure that credit card companies still use cost accounting like the rest of us, that means they know the profit they are getting from "deadbeats," and that the profit they are getting is higher than their cost of capital.
They also know that, unlike the folks they have been fleecing, "deadbeats," use credit as an option, and could stop using it if they wanted.
Every credit card purchase costs the retailer a percentage (say 5%) of the purchase, which is paid to the credit card company. If the "deadbeats," stop shopping with credit and switch to cash, check, debit, etc. the credit card companies lose that 5% of the dollars spent.
To try to increase fees on the "deadbeats," would be cutting off their noses to spite their faces, they would lose money.
Don't listen to the credit card companies when they say they are "losing money on the deadbeats and making it up on the low credit score people," they are lying through their teeth. They make money on all card holders, or they would cancel the card!
Cont...
I am one of those "deadbeats" the CC companies hate. I have had credit cards for 20 years. I never carry a balance.
New rules are NO problem for me...... I already cancelled one card and I will cancel all of them if the rule changes try to screw me.
I can live without them, I wonder if they can live with only irresponsible debtors?
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Great point...on CBS radio this morning, the host from St. Louis asked me if we might see more people shun credit cards. Imagine--a world without plastic--living within our means and managing our financial lives!
Jill: It would be great if everyone, including our governments, local, state, and Federal would do the same - living within their means and managing their money. However, I am afraid that will not be the case for some time. Till then, I will continue to live within my means, save as much as I can, and pay those credit cards off in full every month. It is amazing how far your money goes without debts to pay!
Of course I believe the credit card companies are already planning their next move to replenish any profits lost by this legislation...but this idea that the "deadbeats" or folks who pay their cards on time are going to "suffer" doesn't get my sympathy. If you are profiting (aka rewards, miles, perks) from a broken or unfair system, and that system (attempts to) corrects itself, it's disingenuous to cry foul if you have to take a hit.
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I'm not suggesting that we are going to "suffer" in the larger sense of real suffering, but it's always intriguing to find the unintended consequence of the fix.
Both the irresponsible and the good kids are getting punished by this economy. The only winners? Crooks.
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