Thursday, May 14, 2009


Nobody likes credit card companies. Never mind that they make our lives easier, by making our budgets more flexible and opening opportunities for financial control that our parents never dreamed of having, it’s the politically correct thing to trash them. Even the executives of those companies have been acting like they were lower on the moral value meter than companies selling liquor, tobacco, porn, or political advertising. This is not to say that credit card companies and the banks behind them have all been saints and model citizens, but throwing all the blame on them is not merely unreasonable, but a poor plan for improving the future of credit.

Credit is all about risk. Let’s say you have a buddy who wants you to loan him $50 until the next paycheck. If you do, you’re granting him credit. It’s not hard to understand that you will have different levels in mind. You might not mind giving money to your spouse and kids, you might agree to loan a buddy some money interest-free for a week or two, but outside that circle, you’d probably want something for your trouble, especially since the further away from center you get, the less you can trust that the borrower will pay you back quickly or in full … and in some cases, at all.

That’s why credit cards exist. You have the choice of carrying around a lot of cash, giving someone access to your bank account with a debit card or checking account, doing without because you don’t have the money for what you want (and sometimes need), or you carry a card that will bill you later for your purchases. What’s really sweet about credit cards is not only that you can buy all sorts of things with them, but that a credit card builds a history you can use to buy important things like a car or a house, and if you pay the balance in full each month it costs you only the annual fee to use the card. Credit cards build a reputation of financial responsibility, and they offer convenience and security that cash-alone cannot offer.

So why the hostility? Basically, human habits. We live in a society that often punishes success and forgives failures, and in some cases even protects failure by punishing those who would hold individuals to their commitments and the consequences of their decisions. A lot of people carry balances on their credit cards each month, and they resent having to pay the finance charges those cards require, even though in almost every case the individual was presented with the terms clearly and directly before they started using the card. Some folks pay their cards late, and resent the late fee they earn. The Obama Administration is playing on those immature attitudes, demanding the credit card companies be punished because people cannot manage to pay their bills in full or on time.

The problem for the credit card companies, is that the business model cuts both ways here. These companies chose to sign up people who in some cases were bad credit risks – I mean really, there are credit card companies which sign up people several times for the same card, without once collating the information to track the rising debt levels and default risk. Just stupid, and even more so to imagine that such people can be led to start practicing sound financial behavior just because they get into trouble with their cards. The profit model of credit card companies, after all, depends on people carrying a balance and paying finance charges. If everyone started paying all their bills on time and buying only what they could afford, the credit cards would not be able to operate as a going business. It’s the same reason that the government doesn’t really want people to stop smoking; it’s bad for their bank accounts.

The Obama Administration does not really want to go too far the other way, though. If credit cards were punished for their usurious tactics to the degree that the President’s rhetoric implies, many of the banks behind those cards would abandon the business altogether, as it would become a poor risk for their capital. Discretionary spending would plummet even more, as consumers’ desire to save would be accompanied by a dearth of credit providers for those still eager to splurge. Finding a steady and significant source for consumer credit would become more difficult than getting Obama to say ‘Bush was right’. It just would not happen.

So, enjoy the show but don’t expect much to change. Because when it’s all said and done, only you really care about your own financial health, so you’d better not trust it to a politician or a corporation.

No comments: