Credit Card Issues
July 10th, 2008 at 02:12am Mark Noonan
NRO notes a move in Congress to tinker with credit card fees charged to merchants:
…As credit-card use has increased, the credit-card fees have been a larger item in retailers’ budgets. So lobbyists representing them have gone to Congress to ask for help. Reps. John Conyers and Chris Cannon, a Michigan Democrat and a Utah Republican, have obliged. Their bill would create a panel of judges to force negotiations over the fees and, failing a settlement, impose ones they deem fair.
Remarkably, this attempt to impose price controls has won the support of 17 Republicans, including such conservatives as Joe Wilson (S.C.), John Sullivan (Okla.), and Steve King (Ia.). They should know better. Australia has tried these controls, and the results have predictably been an increase in credit cards’ annual fees charged to customers.
The flaws in the legislation do not end there. Credit unions and community banks that issue credit cards would get hurt badly. Since the bill applies only to credit-card networks that have more than 20-percent market share, American Express would be exempt from it (even though American Express tends to charge higher fees).
Supporters of the bill are said to be considering modifying it. To win over more Republican legislators, they would get rid of the price controls and instead create an antitrust exemption so that merchants could band together to negotiate. No economic libertarian should find this offer appealing. If one side to a set of transactions gets an exemption, so should the other. An antitrust waiver for the merchants would amount to a congressional attempt to rig a deal in the merchants’ favor. If it succeeded, it too would be likely to yield increased fees to customers. And, to repeat, the merchants are not being victimized. They just want a better deal. Which is fine: but they should not get one through an act of Congress.
This is an area I have some expertise in as for the past 7 years I have worked for one of the largest banks - and largest credit card issuers - in the United States and, indeed, the world. How shall I nutshell this complex issues?
Easy - Credit cards suck.
Not the basic concept - as a matter of convenience its hard to beat a credit card. Much easier to just swipe a card than to fumble with cash or tediously fill out a check. But the way credit cards are managed by the banks is just horrific. If there’s a thing a credit card issuer can do to make things worse for everyone (including, in the long run, for the issuer), the banks are doing it. I’ve personally seen circumstances where accounts have their APR more than doubled for no discernable reason. You can’t get a bank to cut you slack on your credit card debt until you’ve gone well past due. The answer to being over limit? Charge a fee, which puts the account even further over limit. And its not just banks being stupid - government stupidity has come into play, too. Like this: for fear of being accused of “red lining” an area of the country, banks have remarkably lowered the threshold for obtaining a credit card, so all sorts of people who are either shiftless or simply ignorant of how credit works are able to obtain credit cards…and run up debts with a large number of late fees, over limit fees and punitive interest rates. Its a massive problem and it invites further interference by government in the marketplace.
What to do?
Well, the problem with massive banks is the same problem with massive government - anything that big cannot run itself properly. We mindless drones stand agog at the practices coming down the pike; for the life of us we can’t figure out what would make an ostensibly knowledgable corporate executive make decisions which are clearly counter-productive. But they are made - again and again and again. We do have our theories - mine is that these executives are so fixated on quarterly statements that they just don’t care what is happening as long as the balance sheet looks good long enough for them to exercise their stock options. Added to greed and cowardice is distance - some CEO in New York City simply can’t know what the credit needs of, say, Nevada are. Nevadans know, but no one in NYC wants to know what Nevadans know - so decisions are ground out which bear little or no connection to the actual problems being confronted or the needs being identified…and a huge smiley face is put on the whole show as the corporation’s executives - desperate to be thought of as nice guys - implement “diversity training” and shovel money out to environmentalist groups.
So, my solution: re-work the tax code to heavily punish large corporations and greatly reward new corporations, and corporations that are small to mid-sized. Force the CEO’s to break down their behemoths (and they’ll do it, too, because they’ll own stock in all the successor corporations) into smaller, regional companies able to actually work within the economic realities of their respective areas…and this would include being able to be flexible in what rates to charge merchants who accept a bank’s credit cards (ie, “mom and pop” can’t afford large fees, but Wal Mart can). In my economic world view, bigness is usually the culprit when there is a problem - bureaucracies and corporations get so big they can’t function but at the same time are so big they crowd out good ideas and innovation. Human beings aren’t built for either a Department of Housing and Urban Development or a General Motors…we’re built for Catholic Charities and Dodge, get it?
Entry Filed under: Economy
21 Comments
1. Credit Crunch » Cre&hellip | July 10th, 2008 at 2:17 am
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2. Sunny | July 10th, 2008 at 9:12 am
Mark, I agree with almost everything you wrote. I worked for years in an industry that dealt with consumer debt, so am very familiar with the Fair Debt Collections Practices Act and how it affects the average consumer. My solution to the credit card dilemma is to pay them off and never use them again unless it is an emergency. The credit card industry is an abusive industry that takes advantage of its customers. I especially find the practice of enticing new college students into signing up for a credit card despicable as the companies know full well these students do not have jobs and will most like default on them to say nothing of the students ability to handle credit.
3. Eric T | July 10th, 2008 at 11:18 am
Mark-
What is your take on debt settlement companies?
I’m still suffering from the bondage of high interest credit card debt. I’m a slave to the banks I owe. I’m still working about 70 hrs a week, throwing everything I can at the debt, trying to pull myself out of the hole. but, I ain’t getting anywhere. The interest rates are so high the balances don’t move. I threw my 401k at the debt, and I’m selling alot of my stuff too. I was thinking about trying the debt settlement, but heard a few horror stories from people who said they ended up having alot of problems with it.
4. Eric T | July 10th, 2008 at 11:32 am
Interest rates on a home loan about 6%.
Interest rates for a car about 7-9%
Why is the credit card able to get away with 20-32% interest. These rates are crushing people.
You see our government bailing out banks, and I think it is a result of people not able to pay these unrealistic rates. If they had affordable rates there wouldn’t be people walking away from their homes and going into bankruptcy.
5. LaMano | July 10th, 2008 at 12:58 pm
I own a business that processes thousands of credit card transactions every day. Nearly 75% of my customers pay with credit cards. My credit card fees now exceed the cost of my EMPLOYEE MEDICAL INSURANCE premiums. And, I am a service business where payroll is my largest expense, by far.
The problem is too few providers, mostly Visa and Mastercard, and the barrier to entry is HUGE. How could another provider ever get started? They are in the driver’s seat and not accepting credit cards really isn’t an option these days.
In the past, I’ve read about WalMart getting into the financial services business for these reasons. They have met resistance. The regulations need to be changed so more competition can bring fairness in this area.
I firmly believe companies that offer better service and refuse to ‘prey’ on their customers, thus reducing bad debts and fraud, would be able to operate profitably with much lower fees. There needs to be more new blood in this game.
6. David B. Schmidt | July 10th, 2008 at 1:12 pm
I have to agree and the best instruction comes from the old saying about “Vegas wasn’t built on winners.” Eric T. — sorry to hear about your dilemma because I was there several years ago.
I decided against them because they want control of your bank accounts including payroll. I just started with the highest interest rate — paid it off and kept going until I was paid off and broke but happy.
Since then I apply the Vegas rule — if I can’t pay cash–I don’t buy; however, I will put it on a credit card (using their money & security) and pay it off in full before the grace period.
7. Retired Spook | July 10th, 2008 at 3:03 pm
Eric, I’m sure there are millions of people in your shoes. Back in the 80’s, when credit card interest ceased to be tax deductible, my wife and I quit charging anything on a credit card that we couldn’t pay off at the end of the month. I say this based on personal experience, so it may not apply equally to everyone, but our experience has been that the longer our history of paying off credit card charges each month, the better our credit has become. I have a business platinum Visa card that has a $20,000 credit limit and a 7.9% interest rate. I also have a Chase MasterCard that is issued through Marathon Oil Company that I use exclusively for gas, for which I get a 5% discount ($.21/gal. at the current price of $4.19/gal.) The interest rate on that card is around 13%, but I pay it off every month, so it doesn’t matter. My wife and I also have a personal Discover Card that we use very sparingly, and we both have MasterCard debit/check cards that use instead of cash/checks.
I do hope you eventually get out from under your credit card debt. Paying and paying and paying and never seeing any daylight has got to be frustrating.
8. Joisey | July 10th, 2008 at 4:25 pm
So basically you want to manipulate the tax code for the purposes of social engineering? How is this any different than what the likes of Pelosi, Hillary, and Obama believe? Oh, they may have different targets than banks… but the principle is the same.
I have no love for ‘big’ banks. But I also have no love for ‘big’ government. At least I can choose not to do business with a bank.
9. Eric T | July 10th, 2008 at 5:52 pm
With the increase of Globalism, More Multinational corporations and foreign banks are coming into the U.S.A.
I like what Mark says about smaller, local banks.
With most banks being heavily invested in real estate. Could you see the scenerio where the foreign banks keep raising their rates to force people out of their homes so they can foreclose on peoples farms and land. Gobbling up large farms or large acreage parcels to sell to their choice developers, or their corporations ran by their government.
We can not go into Iran, China, England, Japan or many other countries and just start buying up land. By allowing foreign banks to come here and bankrupt people with ridiculously high interest rates, then foreclose on their land. We could eventually be turning our food supply over to the multinational corporations. Just as the U.S has done with selling out our steel mills, cotton mills, ect…. We will become dependant on foreign firms for food, just as we have for clothing and manufactured goods. When we sell out, who now owns the land. foreign state run corporations will move in and be setting the prices on our food. Grown here but owned by a foreign firm. Starving the folks here even, shipping crops back to their countries to feed their people. If they can charge 32% interest, they would n’t care if you died of starvation either.
10. FmrMarine | July 10th, 2008 at 7:17 pm
sonny;
>>>The credit card industry is an abusive industry that takes advantage of its customers. I especially find the practice of enticing new college students into signing up for a credit card despicable as the companies know full well these students do not have jobs and will most like default on them to say nothing of the students ability to handle credit.>>>
These “college” students are so STUPID as to fall for the EEEEVVVVVIIIILLLLL CC companies?
Good GRIEF NO wonder we are in so much trouble.
These MORONS are SUPPOSED to be the cream of the crop…YEOW!!!!!
No wonder we have an obamination running for POTUS….The LATE GREAT USA is upon us.
11. keystoneRepublican | July 11th, 2008 at 12:03 am
Credit card companies are just plain greedy. They are not unlike the lenders who wrote sub-prime mortgages the last several years.
I have a Visa and Master Card with Citibank. Citibank had always been good to deal with, until…
A few years back I had great low interest rates. Once the rates started going up, so did the interest rates on my credit cards and boy did they sky rocket. One was as high as 21%. I called Citibank to lower the rates. The rate for one was lowered a decent amount but still not what I thought it should have been. The rate on the card with 21% was only lowered to 16.99%. Now, I have had these cards for 20 years. I have excellent credit (no late payments with any creditor) and a very high credit score. I did not have excessive debt, only a mortgage, car loan and balances on the cards (no, they were not maxed, not even close) and have always lived within my means. The balance on the card was for home improvement because I got a 3.99% APR until the balance was paid. Otherwise, I don’t use my credit cards. I always paid more than the minimum payment. There was no justification for Citibank doing this other than 1.) greed and 2.) because they can.
The good news is that the Federal Reserve has proposed rules to stop some of this nonsense.
Meantime, I’m stuck with Citibank. If I cancel the cards, my credit score will drop significantly because those accounts have been open the longest. I guess it doesn’t matter since I don’t use them anyway. If I ever do use one, I’ll pay it off.
12. Jeremiah | July 11th, 2008 at 12:42 am
‘Woe to you who are rich, for you have already received your comfort. Wo to you who are well fed now, for you will go hungry. Woe to you who laugh now, for you will mourn and weep. Woe to you when all men speak well of you, for that is how their fathers treated the fasle prophets.’
‘Blessed are you who are poor, for yours is the kingdom of God. Blessed are you who hunger now, for you will be satisfied. Blessed are you who weep now, for you will laugh. Blessed are you when men hate you, when they exclude you and insult you and reject your name as evil, because of the Son of Man. Rejoice in that day and leap for joy, because great is your reward in heaven. For that is how their fathers treated their prophets.’
13. Ken | July 11th, 2008 at 8:42 am
After a long time I’m debt free with a high credit
score again. About 8 years ago I had about $14k
in dept. But it was not the card company’s fault, I
was the one going out and buying all that junk.
At some point, people have to be responsible for
their own actions.
14. Eric T | July 11th, 2008 at 1:04 pm
Ken -
I think people need a better product than 32% interest. People do, go out and spend the money, it could be because their job cut their hours, or their insurance stopped covering prescriptions, or because the car needed repair or they needed to eat.
Some folks say we are a consumer economy, no longer a manufacturing economy. If you agree to that, you’d see that the consumer needs money to go buy global imports, with high taxes, high bank interest, and high energy cost. I can’t afford to go to Wal-Mart and buy that pair of new work boots, Instead i gotta wear the worn-out pair that have the steel-toe exposed from wear, and that make my feet itch and burn. You want a good economy, people gotta to make a decent wage, and be able to borrow money easily. There is no excuse for 32% interest.
15. Ken | July 11th, 2008 at 4:01 pm
32% is crappy. No argument there. What makes it worse, the lower your credit rating goes, the higher the interest rate is. Higher rates makes it harder to make the payments causeing the credit score to go down… (at least from what I’ve seen)
Though on the other hand, if you read the contract with the card company, they print out the interest rates. Granted, while there are people that though no fault of their own go in to dept I believe that a large rack up large credit dept because they can’t wait to save up for the next best thing…( tv/sterio…)
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