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PBS: Secret history of the credit card

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Re: PBS: Secret history of the credit card

#41

Post by sokoloff »

rcoder wrote: post #40
sokoloff wrote: post #32

Earlier quoted context omitted.

I agree with you vastly more than I disagree, but will observe that if you manage your debt reasonably, you have the ultimate recourse when your CC company changes your terms: Fire them. Pay that debt off, possibly by borrowing from another company willing to extend you terms more to your liking. I agree that people to whom no one will lend more money are at a great disadvantage. I don't see any way to fix that, as p…

Unfortunately, if you "fire" your credit card company by paying off your balance and canceling the card, you also reduce your credit score, leading to potentially worse terms for your next loan. As stated in the original article, the second-worst kind of credit card user from the issuer's POV is the one who immediately pays down their balance each month, without ever incurring interest or late-payment fees. This is p…

Pay the balance down to zero, and because of the strange quirk in the FICO scoring system, stop using it, but don't close the account. "Problem" #1 solved.

Re: PBS: Secret history of the credit card

#42

Post by anamax »

Retric wrote: post #16
sokoloff wrote: post #11

Earlier quoted context omitted.

Student loans, personal loans other than credit cards, business loans, preferred stock, corporate, municipal and government bonds (from the issuer's perspective) all change price/rate in response to missed or late payments on other obligations. (In the latter case, often dramatically so.) Why shouldn't a lender be a able to offer a contract that allows them to increase their fees when the borrower shows themselves to…

Bond's don't change rate when the company get's into trouble the cost of new bonds goes up. Student loans are normally fixed interest rate loans and they only charge penalty's when your late in paying them. The problem with increasing rates when people get into trouble is it tends to force more people over the cliff. Let's say you owe 20k at 10% and make 50k/year. You get hospitalized for 5k and your old and new rate…

> Bond's don't change rate when the company get's into trouble the cost of new bonds goes up.

That's not true.

Many commercial bond and loans include covenants that cause changes (loan gets called, interest rate changes, etc) when certain things (sales revenue, money in bank, etc) happen.

Some even tie their interest rate to external factors, like LIBOR.

And, biz credit lines do get pulled.

> Loss of a job reduces credit worthiness even if you make all your payments.

It's unclear if you find that wrong or not. Job loss may well affect future ability to repay even if you're current now.

Re: PBS: Secret history of the credit card

#43

Post by anamax »

pragmatic wrote: post #33
ph0rque wrote: post #25

Earlier quoted context omitted.

That's great validation, to paraphrase Arthur C. Clarke: > If an elderly but distinguished expert says that something will be successful he is almost certainly right, but if he says that it won't, he is very probably wrong.

You'd need a huge bankroll to get started. Financial startups aren't as easy as a social media web 2.0 site. Look at prosper.com. Regulatory costs are astronomical. Between state and federal auditors and Sarbanes-Oxley and CRA, etc, you'll have your hands full. Also, why would investor capital flow to you? You'd make a lower return with no upside of lower defaults, etc. But yes go ahead. Start a low rate credit card…

> Sarbanes-Oxley

Only if you're public in the US.

If you're not holding deposits/selling insurance, it's unclear why you'd have financial audits by govt organizations.

You'd have to deal with the restrictions on offering credit though.

Re: PBS: Secret history of the credit card

#45

Post by lnguyen »

helveticaman wrote: post #37
pragmatic wrote: post #33

Earlier quoted context omitted.

You'd need a huge bankroll to get started. Financial startups aren't as easy as a social media web 2.0 site. Look at prosper.com. Regulatory costs are astronomical. Between state and federal auditors and Sarbanes-Oxley and CRA, etc, you'll have your hands full. Also, why would investor capital flow to you? You'd make a lower return with no upside of lower defaults, etc. But yes go ahead. Start a low rate credit card…

More importantly, you'd have to cover lobbying costs for 5 or 6 years just to break into the tight oligopoly.

Discover finally settled a suit with Visa and Mastercard over anti-competitve practices: http://www.reuters.com/article/bankingFinancial/idUSN2735065...

FYI, Discover's been around since 1985 (introduced during '86 Superbowl), suit was filed in 2004 (along with a similar one by AmEx) and finally settled in October for $2.75 billion.

Re: PBS: Secret history of the credit card

#46

Post by run4yourlives »

rcoder wrote: post #40
sokoloff wrote: post #32

Earlier quoted context omitted.

I agree with you vastly more than I disagree, but will observe that if you manage your debt reasonably, you have the ultimate recourse when your CC company changes your terms: Fire them. Pay that debt off, possibly by borrowing from another company willing to extend you terms more to your liking. I agree that people to whom no one will lend more money are at a great disadvantage. I don't see any way to fix that, as p…

Unfortunately, if you "fire" your credit card company by paying off your balance and canceling the card, you also reduce your credit score, leading to potentially worse terms for your next loan. As stated in the original article, the second-worst kind of credit card user from the issuer's POV is the one who immediately pays down their balance each month, without ever incurring interest or late-payment fees. This is p…

Who says you have to cancel the card? Just don't use the thing.

Re: PBS: Secret history of the credit card

#47

Post by ovi256 »

nazgulnarsil wrote: post #36
ovi256 wrote: post #2

Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future - experimental economists found this, but I can not retrieve references right now, my googlefoo is failing. This is a textbook case for regulation. A similar case is car insurance : your (irrational) choice is to not buy it. However,…

um...not buying it is rational. if buying insurance was positive sum then how would insurance companies make money?

Because it is positive sum - which means that it creates value. Fiduciary, insurance companies gain more than you, but you gain non-fiduciary value (tranquility etc).

Re: PBS: Secret history of the credit card

#48

Post by ovi256 »

mseebach wrote: post #3
ovi256 wrote: post #2

Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future - experimental economists found this, but I can not retrieve references right now, my googlefoo is failing. This is a textbook case for regulation. A similar case is car insurance : your (irrational) choice is to not buy it. However,…

Except, when you get credit cards, you get screwed. When you don't get insurance, everyone else is screwed. That's why credit cards are a classical case for information, not regulation. It's a sad sad slope that regulation is incresingly used to protect people from themselves, rather than each other.

A counter-example: think about tainted food. When you unknowingly buy and eat tainted food, you get screwed. When you don't get insurance, everyone else is screwed. That's why tainted food is a classical case for information, not regulation. Just stick an ol' label explaining that it contains dioxin, and let the free market decide.

Of course, that's not what happens. So the harm limited to self argument does not apply.

Re: PBS: Secret history of the credit card

#49

Post by lnguyen »

iamelgringo wrote: post #8
mseebach wrote: post #3

Earlier quoted context omitted.

Except, when you get credit cards, you get screwed. When you don't get insurance, everyone else is screwed. That's why credit cards are a classical case for information, not regulation. It's a sad sad slope that regulation is incresingly used to protect people from themselves, rather than each other.

What other product can you purchase, and have the price change after you purchase the product? What other form of loans/credit can you purchase and then have the interest rate changed without your knowledge and without informing you because of a missed or late payment on a different loan? What other form of loan can increase your interest rate (cost) based on an increase in the balances on accounts with completely di…

The credit card industry is already subject to a sizable amount of regulation: Truth in Lending Act, Fair Credit Billing Act, Fair Debt Collection Practices Act, etc. Granted, that's not to say the regs couldn't be better or start leaning more toward the consumer (especially those changes that happened with the bankruptcy "reform" a few years back) or that the agreements couldn't be written in more straightforward English.

For the issues you've listed (interest rate changes, etc.), all of this information really is included in the agreement you're given when you sign up for the card. And the bank or CC company is supposed to mail out the updates to the terms levels whenever changes are made. You have a choice on whether to agree to those changes or to cancel your card.

What usually happens instead, however, is that people just look at the glossy marketing brochure or whatever gimmick is used to promote the card (airline miles! cash back!). And of course, assume that nothing bad's going to happen.

There's a lot to be said about not signing your name on anything that you don't fully understand. It's the same with any legal agreement: employment contracts, software EULAs, etc.

[Full disclosure: I used to work at Discover.]

Re: PBS: Secret history of the credit card

#50

Post by GHFigs »

sokoloff wrote: post #41
rcoder wrote: post #40

Earlier quoted context omitted.

Unfortunately, if you "fire" your credit card company by paying off your balance and canceling the card, you also reduce your credit score, leading to potentially worse terms for your next loan. As stated in the original article, the second-worst kind of credit card user from the issuer's POV is the one who immediately pays down their balance each month, without ever incurring interest or late-payment fees. This is p…

Pay the balance down to zero, and because of the strange quirk in the FICO scoring system, stop using it, but don't close the account. "Problem" #1 solved.

That strange quirk in the FICO scoring system sounds a lot like coercion to participate under threat of financial harm, i.e. extortion.
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