I believe the twist on this is the saying “he who has the gold, makes the rules.” There was a segment on the NBC Nightly News yesterday about what I consider to be a criminal practice some banks employ: raising rates on existing cardholders due to changes in their (the cardholders) credit score. An example: You have a credit card and the interest you pay on purchases is 14%. Something (and credit scores are way too arbitrary for my taste) causes your credit score to drop, so the bank raises not only your interest rate to 24% for future purchases, but raises it as well on the balance you currently carry. On the street, this is known as the “vig”, and any reputable loan shark (ha. Lets ignore THAT contradiction) who tried this would be considered dishonorable and untrustworthy. In the segment, representatives of the banks actually tried to say that they have found that when interest rates are raised, people pay off their balances faster. Sure they do, but almost always do it by taking out another card with a low teaser rate and transferring balances. Never mind that this practice can and does further lower your credit score.
So, heres my question for you “free market” gurus out there. Without regulation, what protection does the consumer have? It might be different if there were hundreds of competing banks out there, but the reality is that mergers have eliminated most real competition. You can make the argument that people who can’t pay their balances in full every month should not take out a credit card, but thats more than a little disingenuous since we would see a staggering drop in consumer spending if people only spent when they could pay cash. The restaurant and travel industries would suffer immediately. I doubt there would be a Black Friday at all. Don’t even get me started about the car business.
It was regulation that forced some transparency into the consumer loan process. Simple interest loans were not the brain child of an unfettered market economy. Where is the regulatory equivalent for the credit card industry? If thats a bad idea, I’m ready to learn why.
13 responses so far ↓
Volunteer Voters » Street Credit // December 5, 2007 at 12:04 pm
[...] Mack Farmer asserts that the practice of credit card companies raising rates on you in the middle of your relationship with them based on transactions made elsewhere is a practice eschewed by all but the most disreputable loan shark: You have a credit card and the interest you pay on purchases is 14%. Something (and credit scores are way too arbitrary for my taste) causes your credit score to drop, so the bank raises not only your interest rate to 24% for future purchases, but raises it as well on the balance you currently carry. On the street, this is known as the “vig”, and any reputable loan shark (ha. Lets ignore THAT contradiction) who tried this would be considered dishonorable and untrustworthy. In the segment, representatives of the banks actually tried to say that they have found that when interest rates are raised, people pay off their balances faster. Sure they do, but almost always do it by taking out another card with a low teaser rate and transferring balances. Never mind that this practice can and does further lower your credit score. [...]
democommie // December 5, 2007 at 4:24 pm
Mack:
Well, that gift that congress gave to Shylocking, Inc. , when they passed the new bankruptcy bill basically gave the bastards carte blanche. I have several credit cards but the only two I use are both from my Credit Unions.
Citibank and the rest are pains in the ass, but Discover is scum.
The Missus // December 5, 2007 at 4:55 pm
Where are the free market gurus? I’m patiently waiting. Maybe you should ask Bart Gordon, if you can catch him.
Katherine Coble // December 5, 2007 at 9:41 pm
Well, this free market guru was going to say “don’t take out a credit card” but then he pre-emptively shot me down.
seriously, though, don’t take out a credit card.
It’s not that hard to live without one, really. I’ve done it for 15 years now.
Music City Bloggers » Blog Archive » Yet Another Way The Credit Card Companies Can Screw You And Get Away With It. // December 6, 2007 at 10:34 am
[...] you may imagine, local bloggers have more than a little to say about this whole thing. Mack of Coyote Chronicles is doing some hard thinking on the subject. So, heres my question for you “free market” gurus out there. Without regulation, what [...]
Glen Dean // December 6, 2007 at 11:27 am
Certainly if Congress can stop telemarketers from calling your home, they can do this. Regulating an industry like the Credit Card business doesn’t encroach on my free market principles at all.
Tman // December 6, 2007 at 12:04 pm
Hi Mack,
You ask-”Without regulation, what protection does the consumer have?”
None, because there is no regulation.
“It was regulation that forced some transparency into the consumer loan process. ”
No, there already was “transparency”. You have to sign a contract to get a loan. That’s pretty transparent. What you’re talking about is regulating credit card companies from taking advantage of consumers who are irresponsible with their spending habits. I would agree that we should regulate these companies so they can’t take unfair advantage of people.
“Where is the regulatory equivalent for the credit card industry? ”
It’s called the Truth in Lending Act among others. It’s a law designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement and all costs. The statute is contained in title I of the Consumer Credit Protection Act, and the regulations inplementing the act are under Regulation Z. Currently Senator Levin introduced the “Stop Unfair Practices In Credit Cards Act” which I believe has some merit, but does raise this troubling question- If penalties and fees are forcing some credit card users to spend responsibly, what’s going to keep them from paying late and going over the credit limit when the penalties are reduced or removed?
Credit Card Regulation, Free Markets, and Paying Cash | Hear ItFrom.Us // December 6, 2007 at 12:54 pm
[...] The Coyote Chronicles challenges Free Marketers to defend deregulation of the credit card industry: You can make the [...]
democommie // December 6, 2007 at 8:01 pm
Tman:
The credit card industry charges up to 34% in some cases. That rate is usurious. If they want to keep people from getting into debt they can’t get out of they shouldn’t give them credit cards with spending limits that are sky high with interest rates to match.
Tman // December 7, 2007 at 10:50 am
If they want to keep people from getting into debt they can’t get out of they shouldn’t give them credit cards with spending limits that are sky high with interest rates to match.
So it’s the credit card companys fault for offering a voluntary service? Is someone holding a gun to their heads forcing them to buy things at 34% interest? I agree that 34% is ridiculous, but jeebus man, how is it the companys fault that people take on the interest anyways? When people have bad credit they are a credit risk, and banks have to charge higher rates to make up for the risk, since there is a high default rate. But at no point are people being forced to pay this rate.
Aunt B. // December 7, 2007 at 12:08 pm
Well, you are being forced to pay it if you are carrying debt on their card. I mean, if you sign up for a credit card at 8% and the small print warns you that it could go up to 12% or 15% if you don’t pay on time and so you pay on time and you pay what they tell you you have to pay, you expect to pay 8%.
To find that they can raise your interest rate because other people have had problems with you is a cruel joke. If I don’t pay my power bill, they don’t switch my phone service off.
democommie // December 13, 2007 at 8:00 am
Tman:
34% used to be considered “usurious” and was not allowed in most states. My credit unions ( I belong to 3) issue credit cards with a top rate of about 10%. Somehow, they manage to stay in business. Companies like Amex, Citibank, Discover and others of their ilk claim that they have to charge high interest, in part because of default losses–seems to me that lowering interest rates might slow down the rate of default. Also, the same banks that would issue me a credit card back in the 80’s, with limits that were much higher than my annual pre-tax income, would not loan me a dime otherwise.
If it was not for the fact that congress passed that omnibus credit/bankruptcy law a few years back interest rates would not have soared like they have. The creditors know that, now, you can declare bankruptcy and be destitute and STILL have to pay them back. That law is a travesty and should never have gotten through congress, never mind get signed by that frat-boy, failed businessman who sits in the WH.
People who cannot pay back the money they borrow should not be able to borrow it. But if some unethical, unscrupulous lender is greedy and stupid enough to make the loan, the government should certainly not be bailing them out.
Ror! // December 29, 2007 at 2:15 pm
A Harvard law professor calls credit card contracts indecipherable:
http://www.corporatecrimereporter.com/warrengross032807.htm
According to George Washington, government is force. According to the document that represents the highest law of the land that force is to be ordained and wielded by the people to, among other things, establish justice. The folks that started this shindig were not libertarian anarchists. They knew that justice would not simply establish itself.
The worst problems occur as the people are convinced to sell out their power in exchange for promises of security or prosperity.