Thorne's Post to the NYT's blog, "Room for Debate"

A couple days ago, I was asked to write up a comment/response to the following statement for the NYT’s blog, “Room for Debate: A Running Commentary on the News”:

“As Congress and federal regulators move to limit how much banks can charge credit card holders who’ve fallen behind on payments, banks are starting to think about making up the lost income by going after those with good credit – like reviving annual fees and eliminating or reducing grace periods for paying off card debt. We asked some experts, should responsible card users (those who typically pay off their monthly charges) bear the cost of credit card services as revenues decline from those with credit problems? Would that shift penalize habits of thrift?”

For what it’s worth, my response is written below. After listening to the stories of indebted Americans for the past decade, I have had it up to here with the portrayals of them as irresponsible deadbeats--so very few fit this stereotype. Therefore, consider yourself forewarned--my pro-consumer perspective is obvious.

Those who pay off their balances every month are not the only “responsible” consumers. There are millions of Americans who, although they may carry a balance (i.e., “revolvers”), still make that minimum monthly payment religiously and responsibly. Indeed, these folks are the financial “sweet spot” for the credit card lending industry, are they not?

It’s important and only fair to acknowledge that just because one carries a balance does not necessarily mean that one is irresponsible — maybe just in a lower socioeconomic class. On the other side of that same coin is the assumption that those who pay off their card balance each month are necessarily “thrifty.” I would argue that the issue is more one of financial privilege and less of thrift.

Now that there are some limits on how much the banks can scrape off the backs of the most vulnerable, they want to feed off of the rest of us.

We need to be honest and transparent about the core objective of the banks with this potential expansion in fees. They want to maintain credit card lending as one of the most profitable arms of their industry. Historically, they’ve done it off the backs of the lower income and financially vulnerable — those who carry a balance or who might be less financially stable and therefore more likely to miss a payment. Now that there are some limits on how much wealth the banks can scrape off the backs of the most vulnerable, they want to start feeding off of the rest of us. The fundamental issue here is the profit margin of the lending industry.

If lenders had maintained reasonable fees and interest rates to begin with, typical revolvers would not default and would continue to make those minimum monthly payments until they went to their graves, and the profits of card lenders would still be beyond comfortable.

The shift toward more fees for everyone isn’t about fairness. The lending industry wants an increased profit margin, and if that means achieving it through other means (charging new and expanded fees to use their cards), they’ll do it. Don’t blame the revolver who has been making his or her minimum payment for years but has now lost a job or gotten sick and has therefore fallen behind on payments. (Remember, once the borrower slips up and is late with a payment, he or she is severely punished: the lender begins charging insanely high interest rates and single-handedly pushes many of them to the brink of bankruptcy.)

Put the blame where it belongs: on a greedy and unregulated lending industry that is out of control and utterly disconnected from the financial realities and struggles of the everyday American.

Comments

[Fraud Guy]

"(Remember, once the borrower slips up and is late with a payment, he or she is severely punished: the lender begins charging insanely high interest rates and single-handedly pushes many of them to the brink of bankruptcy.)"

Hear, hear. From personal experience, multi-handedly. Some cap and close, some negotiate, and some push the fees and interest higher and higher to force action.

I know anecdotes are not data, but numbers don't tell the whole story.

[Patches]

I agree. I have recently seen people making 150k a year being pushed into bankruptcy because of higher minimum payments and interest rate hikes. Its hard to see macro numbers when a "real live" person is sitting in front of you with those same problems. With fees, increased interest rates and people only making the minimum, Credit Card debt can be on par with 15-25 year amortized mortgage interest...maybe more with late or slow payments.

[CathyG]

I don't understand why more people aren't telling the credit card companies to pound sand. If they jack your interest rate through the roof, don't pay. Not anything.

What are they going to do to you? Raise your rates, report you to the credit bureau? Oh yeah, they already did that.

Put half of what you were paying them into a savings account every month. After 15 months, they'll probably be ready to settle for whatever you've set aside because pennies on the dollar is going to look a whole lot better to them than nothing on the dollar.

With all the foreclosures, bankruptcies, defaults and missed payments, if the repression lasts another 2 years there won't be a dozen people left in the US with a credit score over 550. Not to mention the fact that these factors are going to destroy the risk and predictive models based on credit scores. I think the credit companies will then discover that they can be a little more forgiving of payment history than they are today.

["Put the blame where it belongs: on a greedy and unregulated lending industry"]

I suppose that I'm being a bit too rational to believe that the fault still lies with the person who uses the card.

My Grandmother still believes that the automakers are at fault for speeding too since "they make cars that go to fast,..."

[Patches]

We are not going to be able to buy our credit scores soon anyway.

[Fraud Guy]

CathyG,

Unless the balance got high enough that they will take you to court to force payments and garnish wages.

(n.b. I was able to negotiate that one from a 5 year 9% garnishment plan to a 6 1/2 year 0% self pay plan.)

[Linden]

Even if the credit card companies raise rates, the more solvent borrowers, for whom credit cards simply serve as a floating loan they pay off at the end of every month, will move to cash for more purchases.

[Patches]

Depends which state you live in Fraud Guy. Can't do that here in the Lone Star State. The most they can do here in Texas is freeze a bank account. They can't even do that if all you have in there is Social Security money. That was a darn good workout though. Homes, Stuff in the homes, cars, wages.... all of that is sacrosanct here in Texas and protected with the exception to Government actions.. ie. IRS, Texas Workforce Comm...etc.

[Jim Quist]

I have been blown away by how many people that tell me they aren't banking any longer, i.e., forget checking, savings, cd's, etc. Yes it's back to the old mattress and/or mason jar buried in the back yard.

As for credit cards, debit cards, gas cards and the like? To say I am stunned by the number of individuals cutting them up and using cash is an understatement. These aren't low income consumers either.

Banks and card issuers need...no, they must gain the trust of the consumer again. Swallow your pride or find yourself on the unemployment line with a growing number.

[Michael T. Hertz]

The problem with credit cards is that they have several functions. The original notion was that they were a simple means for dispensing unsecured credit. But they have become a means for a creating a form of electronic cash (for those who pay off their credit cards). They are also used as a means of getting people to purchase from certain sellers (e.g., specialized cards for airlines) by offering incentives. I don't doubt that if someone were to think hard about the matter they'd come up with other functions that the cards serve.

My point is that the cost of some of these functions may not be completely borne by the revenue they generate. If no one used credit cards to borrow on (because the cost is too high), how would the card companies generate the money necessary to keep in business. Presumably by (1) charging a use fee to the card user, and (2) charging a use fee to the sellers who allow purchasers to use them.

There are some forms of commerce (internet sales, for example) which would find it difficult to operate without credit cards or the equivalent. I suppose that they could operate using something like "PayPal" (with the latter getting paid by direct draws against bank accounts) but it would be clumsy.

[Judge Roy Bean]

What most pundits won't come to grips with is the reality of life that low/no interest users have been subsidized by high interest borrowers.

You can't have it both ways. When subprime borrowers aren't going to be paying usurious rates and fees someone will have to make up for the shortfall on the balance sheets.

[Debb Thorne]

Judge Bean:
I couldn't agree with you more--and wish that I would have brought up this exact point in my NYT comment. To all those folks who are paying high interest rates and high fees, know who you are subsidizing. This another example of a common social phenomenon--people in the lower socioeconomic class subsidizing those in the high social brackets.

[Patches]

I think what made things worse is that those people in that "lower socioeconomic class" have either reached their limits (lake is too full) or can't risk it anymore. I don't think Bankruptcy reform did what they thought it would do. I think because of how and when they passed BK reform, it increased the "pool" of insolvent Debtors (I think they accelerated it really). If the flow out of that pool or lake was emptying a bit faster we would not be seeing the havoc we are seeing now.

I always ask our clients when we get into discussions about credit card debt. Who do you think the credit card companies make more money on? The people who pay their debts completely off at the end of the month or someone with 3k in credit card debt, making only minimum payments at a 29% interest rate to boot? DUHH!

[Clayton]

There's "pro consumer" and there's "ignorant rhetoric"... Debb has managed the latter in this post.

Revolvers have developed negative savings (debt) and an unwillingness to manage their own budget to restore those savings (paying down balances). Debb avoids the real issue by trying to paint these people as responsible, low risk borrowers. They are THE EXAXT OPPOSITE.

===

A responsible, low income individual has a slowly growing savings account and (normally) a zero carry-over balance on their credit cards. Occasionally, an unanticipated expense forces them to dissave. For certain mental accounting reasons, they often dissave by increasing their credit card balances rather than reducing their savings -- it's easier to force yourself to pay off a card than adjust your saving habits to restore some theoretical level of savings (that you would have reached had you not "raided" your savings for the expense).

However, RESPONSIBLE PEOPLE slowly pay down those balances to restore overall financial stability... they don't make minimum payments forever.

They are certainly temporary victims of high interest rates. Their attempts to restore a zero balance should not be substantially injured by high interest rates. We should do our best to protect these consumers if the cards don't appropriately respond to these relatively low risk people.

And if you're making $150,000 and living the same way, you're clearly NOT poor and must therefore be utterly irresponsible. Your ability to make responsible spending decisions, generate net savings, and pay off balance should be self-evident.

===

While she could have talked about responsible people, Debb actually mentions irresponsible people:

"There are millions of Americans who, although they may carry a balance (i.e., “revolvers”), still make that minimum monthly payment religiously and responsibly."

Almost by definition, these people lack a real savings account (or are irresponsible by borrowing at 18% and lending at 2%), have dissaved through their credit cards, and then direct their whole budget to consumption (less basically interest on balances).

These people are extremely high risk because any unexpected expense is likely to push them into bankruptcy...

... and as someone with nearly perfect credit, I shouldn't be paying higher rates because banks can't raise rates on these people

[Pathes]

Irresponsible? Some, I guess? Responsible People? Who are they? Are we going by "Claytons" definition of "Responsible"? I have seen firefighters who actually save people from death(on a daily basis)who have had to file Bankruptcy and yes they have had high credit card debts. Circumstances beyond control? Some, but the slope is so slippery even for someone who has had more than 2 years of college-masters-doctors. Can someone have a laps in "Responsibleness"?..... The odds favor it. Are the ones who do slip up,"sacrificial lambs"? Sounds like it.

So the Credit Card Companies have no culpability when it comes to lending? Was there any thought to sustainability? Apparently not! I love Capitalism but one of its "crack addict" side effects is, when you find a good thing you squeeze the everliving crap out of it till its gone....kind of like the Buffalo. Never mind that there may be a pretty darn good chance of lending to so many people that if something went wrong.... a disaster.... a down turn... recession....massive job losses..... that the crap would hit the fan. Lets apply your definition to the other side for once and I'll concede that there are some irresponsible borrowers out there.

So those are the problems. What's the solution? Debtors prisons? Hope not. Some of our clients actually do think they will go to prison for owing credit card debt. Probably something in the middle. I don't know about you but I spend a lot of time with the people at the other end of the spectrum and "Utterly Irresponsible" is not the term I would use to describe them just by looking at their finances. To me Judging people I don't know is rude and self serving. None of which makes my life or job any easier. Ignorant? Guess I'm in that class too. Wow... A Person wanting to help someone they don't know is Ignorant these days.--?? It was a good take of what happens on this end. I liked it anyway. I miss the days when working to help someone you don't know was considered "Responsible".

[zbird]

Before reaching the question of whether it's fair for credit card companies to increase fees on people w/ good credit who pay the full balance every month, the first question to ask is whether they CAN.

In a free market, no business can raise prices on customer A just because it suddenly became more expensive to service customer B, for the simple reason that Customer A can always go elsewhere. So the local market can jack up the price of milk just because the market's margins on eggs went down. There is more than one place to buy milk.

Similarly, no credit card company can unilaterally up the price or reduce services for people who pay their balance on time. Unless they are threatening to conspire to act together, in clear violation of the Sherman Act. getting treble damages from them would almost make up for their obnoxious fees.

[Jennifer]

The credit card rate now is very high and it cost us a lot of payment. I had check my free credit report on last time and very upset.