Why Credit Card Companies are so Mean

[Berkut]

Even when they are no longer children?
Why end it at 21?

21 is the age of majority for many US states and you can't get a drink until you're 21.

Imho, in your case, the provision for having paren't permission before 21 is justified.  It wouldn't be in Canada, as the legal age of majority is 18, and anyway, parents consider their children to be infant until they start taking care of them at the nursing home.

The age of majority in the US is 18. At that point you can enter into contracts, get drafted, get married, etc., etc., etc. The only thing you cannot do is buy booze in some places.

And apparently, now, get a credit card. You can enter into every OTHER kind of legal contract though.

[jimmy olsen]

I gleefully anticipate how much this article will make Berkut froth.

http://www.thebigmoney.com/articles/money-trail/2009/05/19/their-own-interest

In Their Own Interest
Government is saving the credit card industry from itself.
By Mark Gimein
Posted Tuesday, May 19, 2009 - 3:15pm

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Has there ever been an industry so relentlessly at war with its customers as the credit card industry is now? Watching new credit card legislation sail through Congress this week is the industry's reward for giving even its most responsible customers the overwhelming sense that they are getting ripped off. Indeed they are, and there is no more compelling, incontrovertible proof than the flimflammery of "over the limit" charges.

Last week, in a town-hall-style anti-credit card rally, President Obama shared his stage with a woman who had accidentally charged a payment to the wrong credit card, which let the payment go through, then turned around and said she was "over the limit" and raised her rate to 30 percent. This neatly encapsulates the worst practices of the credit card industry. Credit card companies can easily just turn down a charge that put a card over its maximum. No harm, no foul.

Instead they happily let their customers go over their limit (raising the question of why it's called a "limit" in the first place), then say that those customers are in default on their agreements and raise their rates. Pulling out the wrong card to pay for light bulbs at the hardware store turns into a mistake that results in hundreds of dollars of extra interest charges. The credit card companies claim, amazingly, that they do this to spare their customers the embarrassment of having the card turned down.

Over-the-limit rate hikes are the most indefensible example of rate changes—for being late on a payment, for having a lower credit score, or for no reason at all—that give credit card holders the sense that they have fallen into a Queen of Hearts world where the price of credit is whatever the banks say it is. For credit card issuers this is a customer relations disaster. But even setting aside the obvious problem of having customers who hate you, it is also terrible business.

Preventing card issuers from arbitrarily ratcheting up rates—as the legislation now on the table does—isn't just a way of protecting consumers. It is also, just as importantly, a way of saving the banks from themselves.

The most telling example of just how shortsighted the worst practices of the credit card industry really are is a company called Advanta (ADVNB), the country's 11th-biggest credit card issuer. A walk through a site such as Ripoff Report will yield several bushels of stories of customers who saw Advanta raise their rates, often to 34.99 percent, for the flimsiest of reasons or no reason at all. Among credit card issuers, Advanta stands out for the number and rancor of the complaints.

You'd think that this kind of customer-gouging would at least be profitable. It is not. On the contrary, it has been an unmitigated disaster. Last week, Advanta announced that it would shut down all of its customers' credit lines in June and close down its credit card business. Advanta's losses have already hit 20 percent—the worst-case scenario envisioned in the government's bank stress tests—and are certain to rise. Advanta, which two years ago actually issued a press release bragging about its "stellar" results, is now nearly worthless, with a share price at about $1.

What makes Advanta a telling and important example for the banking industry is that what happens when credit card issuers raise their rates to sky-high levels is largely uncharted territory. In general, the experience of credit card issuers that focused on marginal customers (such as Household Bank, bought by HSBC (HBC) and dragging down HSBC's results) is not promising. The difference with Advanta is that its customers were not "subprime": A look at a typical pool of Advanta cards shows that 80 percent of its customers had prime credit, and another 11 percent are what the industry classifies as "near prime." Half its customers have credit scores of 720 and above, the upper end of the prime range. What Advanta shows is that the strategy of starting off by offering attractive rates—Advanta focused on small-business customers—and then gouging your way to profitability may be even more ill-advised.

Bad as this is, this isn't the whole story. In addition to the reliable customers that banks rip off and alienate with arbitrary rate increases, there is another set of customers facing higher rates: the ones whom the banks want to alienate. These are people with overextended credit and declining credit scores. For these customers, the banks' fondest hope is that they will be ticked off enough by the new rates to pay off their balances.
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For a single bank to raise rates to a sky-high level is a dangerous strategy. When many banks adopt it, however, it gets much worse. Customers who see the rates on all of their credit cards rise become much less able to pay any of them. If banks try to one-up one another's rate increases to get paid the fastest, the likelihood is that in the end fewer will get paid.

Do banks see this? I would guess they do. One reason I think this is the evidence of my own credit cards. Several of them have a "universal default" clause in their contracts, which lets them raise my rates if I'm late on any loan or credit card. None of them, however, have exercised that option: I suspect their data crunching tells them (correctly) that if all my rates were to suddenly rise, the likelihood is not that I would magically repay my debts but that I would no longer be able to afford to pay even the minimum.

For every bank to raise rates at once hoping to be first in line to be repaid—essentially what many customers are facing now—amounts to a bankers' suicide pact. Yet, pressed to deliver short-term results to prove that they are back on their feet and desperate to push risky borrowers into repaying credit cards while they still have money available, banks persist in playing the rate-increase game.

I spoke last week with Richard Vague, a onetime banker who was the founder and longtime chief executive of First USA, a major credit card issuer. Vague made the point that credit card issuers are under tremendous pressure to increase their short-term profits right now. "What's changed," Vague says, "is the time horizon." Bank chiefs right now, says Vague, are probably a lot more concerned about the next quarter's earnings than about the years ahead.

Over the long run, charging what amounts to an undefined "market price" is just as bad for banks as for their customers. The Mafia can keep putting the screws on its clients because it has the option of breaking their legs and taking over their businesses. Even the least-scrupulous credit card issuer can't take advantage of these extralegal options. For them, the endgame of arbitrary and outsize rate increases holds not extravagant profits but an epidemic of default. Just look at Advanta.

This is why when all the Sturm und Drang is over, a new set of credit card rules will turn out to be not the death knell for the credit card industry but a lifesaver. The competition to squeeze the last bit of profit from overextended customers is one that the banks should be desperately trying to avoid and are clearly unable to on their own. New rules are the best way to curb the banks' own dangerous short-term impulses. The industry's lobbyists have tried to paint credit card reform on as a declaration of war on the banks. Actually, it's the banks' best chance to end the war with their own clients.

[Berkut]

Hehe, so banks that engage in predatory practices and try to gouge their customers go out of business?

And this is a bad thing, that needs fixing?

[Caliga]

I can tell you some repo stories if you want.

Ed the Repo Man? 

[Valmy]

Hehe, so banks that engage in predatory practices and try to gouge their customers go out of business?

And this is a bad thing, that needs fixing?

Yep.  It seems like the system works.

[DGuller]

I gleefully anticipate how much this article will make Berkut froth.

http://www.thebigmoney.com/articles/money-trail/2009/05/19/their-own-interest

The article's point seems somewhat split, IMO.  On the one hand, it talks about a terrible card issuer going out of business because of its terrible practices.  On the other hand, it tries to make a rat race argument, where the government intervention actually benefits the industry by preventing destructive competition.  Those two are different and somewhat opposing arguments.  I'm also not sold on the rat race argument, he doesn't make a convincing case for it.

[viper37]

Assumptions and presumptions are useful, but only until you have actual data.  The actual data, reflecting real life rather than ideals, shows that credit cards are breaking a lot of people.

oh, but I do have data.

Just look at the law of any country.  It will tell you who can and who can not enter into a contract.

[viper37]

I fail to see the parallels with credit cards.

In both cases, the industry can make the most money by actively screwing the consumer.

The fact that both are intangible products may be what leads to this...

over the long term, they will simply lose their customer base as they shift to an honest insurance company.

[ulmont]

over the long term, they will simply lose their customer base as they shift to an honest insurance company.

Depends on how much a name change costs.

[viper37]

So you think that consumers should get at least 21 days of free credit?  Interest is only charged on late charges so all this does is increase the total cost of carrying a card which will be put on the backs of others.  Likely the merchants who pay the facility fees which will in turn increase the cost of all goods and services.
Just peachy.

They do get 21 days of free credit from major CC companies.  But some companies will simply ship you the bill a tad late, so you end up paying interest rates because you're left with only 1 or 2 business days and you bank takes at least 48hrs to process your payment via the internet, even worst if you mail a check.

You could make it 15 days, I don't really care, but as I said, oil companies are notoriously bad for this.

[viper37]

over the long term, they will simply lose their customer base as they shift to an honest insurance company.

Depends on how much a name change costs.

quite a lot for an insurance company.  It's not a potato stand, you can't just start a new insurance company like that, in 24hrs.  The process is rather lenghty and must meet with various governmental offices approval, and the shareholders who are not 'unique'.

[alfred russel]

Fundamentally, the problem that the "lots" of people DG and Alfred are talking about have with credit has little or nothing to do with the terms of their loans. I do not believe that there are that many people who are in serious trouble with credit debt who would not be in serious trouble if only the bank did not change their rates or give them a free t-shirt.

They are in trouble because they have borrowed way more than they can afford. It is just that simple.

This is band-aid, populist, feel good legislation. It is everything that is wrong about the liberal view of government, business, and individuals, wrapped up in one tidy little abortion of a bill.

Are you grossly in debt and have no way to pay for all the shiny toys in your house?

Well, it isn't YOUR fault, gosh no. It is those nasty Big Banks and their Predatory Practices that have got you into such dire straits! And of course you, as a ignorant consumer cannot possibly protect yourself from Big Business, so The Government shall come in and save you from them - and save you from yourself, because we know best. Vote for me! *I* can protect you!

With the exception of the third paragraph, which editorializes against the bill, I agree completely with your post.

I still favor the legislation.

Will it solve our problems? No. Will the culture of taking out too much debt still persist, and create economic problems down the road? Yes. But in a country that has a significant number of people that are unable to understand the basic financial decisions they must make and their ignorance is dragging down not only themselves but the rest of us, I think it is a good thing to make the credit process a bit more straightforward and less punative.

[Caliga]

Our local utility company pulls that shit on us all the time.

(i.e. sending the bill extremely late)

[ulmont]

quite a lot for an insurance company.  It's not a potato stand, you can't just start a new insurance company like that, in 24hrs.  The process is rather lenghty and must meet with various governmental offices approval, and the shareholders who are not 'unique'.

Yes, government regulation does make it less likely for modern insurance companies to screw customers.   

[Ed Anger]

I can tell you some repo stories if you want.

Ed the Repo Man? 

I am: talented

I drove the van with the spare drivers on a few runs for somebody I know.

The side shit I've done would pad my resume nicely.