
PBS: Secret history of the credit card - kalvin
http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.html
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ovi256
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, as this increases the cost on
society, and (I think) on yourself in the long term, regulation is imposed -
in the form of compulsory insurance.

~~~
mseebach
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.

~~~
iamelgringo
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 different companies?

I've meet well educated Md's and people with Master's degrees who've gotten
screwed by credit card companies. It's not a matter of education, IMHO. It's a
matter of deceptive business practices that people don't really get wise to
until they've gotten burned badly. Have you ever tried to read through a
credit card agreement? I'm a well educated man, and I can't make heads or
tails of those agreements.

I'm sorry, but even an industry needed regulation, its the credit card
industry.

~~~
sokoloff
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 be a less than ideal
credit risk at some point in the future? The borrower signed the terms; if
they didn't like them, they could have not signed them, or they can pay off
and close the account now. Those are the two (non-bankruptcy) avenues for them
to get out of the contract that they now don't like having signed.

~~~
Retric
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 becomes 33%.
You have gone from a 2k /year to 5k/year when you need to borrow 5k more. If
the company lending you 5k wants to charge you 33% interest that's fine you
can focus on paying them back first and get free of debt but when everyone
starts raising your rates while your in trouble it's almost impossible to get
out of the hole.

PS: Not to mention demonstrating a lack of good credit is an ill defined
concept. Loss of a job reduces credit worthiness even if you make all your
payments.

~~~
sokoloff
Concede the point on bonds held to maturity; you're right.

Private student loans are variable interest rate loans, many at the whim of
the providing company. (I'd agree that private student loans are much closer
to evil than revolving credit, and that more education is due on both topics
to consumers of both types of debt. But I'm still not in favor of restricting
the availability of a financial product that might not be in any given
consumer's best interest, so long as it is in the best interest of _some_
consumer.) Govt-backed student loans are as you describe.

As to the over the edge "problem", that's a problem of the consumer's making+,
and a creditor acting in their own best interest probably OUGHT to tighten
credit for borrowers that it identifies, even on an acturial basis using
information unrelated to the direct consumer<->creditor interaction, as being
a higher risk.

\+ - Debtors who are not in over their head generally don't face these
problems.

~~~
Retric
My point is I am not in debt over my head in part because I am considered a
low risk. My car loan is at 4.9% and my CC debt is at 9%. If my interest rate
where to grow to 12+ on the car and 33% on my credit card I would have far
less slack.

Edit: Ok, running the numbers it would not be that bad but I would become far
more focused on having zero debt.

~~~
sokoloff
For your long-run personal wealth, do you think you would you be better or
worse off focusing on having zero short-term debt?

~~~
Retric
Edit for clarity: My CC debt is at 9% which is a little more than investing in
the stock market on average, but I am trying to build up better credit so it
seems like a good idea to keep money in the market and take a little hit vs.
paying off my CC debt.

Not that the last 3 months suggests the idea is without risk but it's not
enough money that I really care. However, if I had less in the way of assets
an my rate where to spike I would quickly start caring.

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shimon
I'd really love to see an explanation of the structure of the credit card /
payments industry in terms of what roles different corporations play, who are
the major players in each role, and how they make money. I understand there
are networks like Visa, which seem to basically administer account number
namespaces and perform some role in clearing payments between banks and
merchants. There are also payment processors, who contract with those networks
and provide services (card scanners, online payments, etc) to merchants. And
there are lending banks, who pay the merchants (via their processors, I guess)
and bill the consumer as they would for any loan.

My guess is that at one or more levels of this industry, there is an effective
cartel: if you want to offer a credit card that's better for merchants, or
consumers, or just run more efficiently, you're unlikely to be able to buy
your way in. It does seem ludicrous that 1% to 3% of your purchases (or, from
the merchant's side, revenue) goes somewhere into Visaland instantly; this
seems like a massive privatized tax in return for administering an electronic
payments system which might not be that difficult to replace today.

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ph0rque
This suggests an opportunity for a credit card startup that:

* Charges no fees of any kind

* Charges a rate that is determined by a publicized equation where the _only_ variables are the amount borrowed, time (in, say, days), and the rate.

~~~
jimbokun
Or in the words of Mr. Kahr:

"You know -- 'transparency card,' 'rock solid card' -- whatever it may be. I
don't believe that that would succeed."

~~~
ph0rque
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.

~~~
pragmatic
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 company. I might sign up for
your card!

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

~~~
lnguyen
Discover finally settled a suit with Visa and Mastercard over anti-competitve
practices:
[http://www.reuters.com/article/bankingFinancial/idUSN2735065...](http://www.reuters.com/article/bankingFinancial/idUSN2735065420081028)

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.

------
netcan
_Mr. Kahr, for one, makes no apologies. "If someone is riskier, he should be
paying a higher rate,'' he said. "It's more economically sound. It's fairer
for riskier people to pay a higher interest rate, higher fees, whatever it is,
than less risky people._

Interesting. What he is really saying is 'what's fair got to do with it? Free
markets dissolve the concept.

 _"If there was a demand for a credit card product that never changed its
terms and rates and stuck with the customer no matter what, I'd be running
around telling people 'Let's market this wonderful fairness card,'" he said.

"You know -- 'transparency card,' 'rock solid card' -- whatever it may be. I
don't believe that that would succeed."_

~~~
sokoloff
"What he is really saying is 'what's fair got to do with it?"

Huh? People who are "riskier" paying higher rates and fees _IS_ fair. Would
you lend your (presumably hypothetical) deadbeat, drug-addled uncle your
entire $100,000 retirement nest egg at the same rate and terms that you'd lend
the US government?

Why the hell not?! He's family, and these big mean credit card companies are
profit-seeking arms-length lenders, and you would expect them to act morally
better (by your standard, not mine) than you would to family? (I would neither
expect, nor as an investor, wish for them to do that.)

~~~
iamelgringo
I'm sure that paying a premium to borrow money once you are a credit risk
would be considered "fair" by many. But, the example that you've posed is a
straw man. Of course you'd charge a drug addict higher interest than the the
US government.

The problem with credit card companies is that they loan the initial money at
one price, and then adjust the price dependent on changing credit scores,
insurance claims or whims.

And, a large percentage of a credit card companies, profit isn't in the
initial interest rate. The profit is made in late fees, over limit fees and
credit rate increases. So, they have a vested interest in the customer
defaulting, being late in their payments or in going over their limit. And,
when those fees are assessed, the customer generally has little recourse.

~~~
sokoloff
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 preventing CC companies from
offering variable APR offers in the future will likely make things worse for
marginal customers; it will just make the companies completely unwilling to
extend them credit. Embargoing consumers who are already suffering doesn't
help them in the short term.

~~~
rcoder
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 possible only because of the altogether too-cozy relationship between
the credit rating agencies and card issuers. I think any regulation of the
lending industry should start with the credit rating agencies, and move on to
the banks only after they've established effective oversight and consumer
protection in that space.

(Incidentally, my disgust with the normal lending practices in the credit card
market is the reason that the only one I will carry is a small-limit emergency
card issued by my local credit union. Since they're a member-owned not-for-
profit institution, I have far more trust in their desire to serve my
financial needs, rather than trying to screw me over for a buck.)

~~~
sokoloff
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.

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

------
helveticaman
"The industry also got an unintended boost from President Carter. In 1980, as
part of a short-lived effort to tame inflation, the White House imposed a
freeze on soliciting new credit card accounts. The freeze only lasted for a
few months, but it was long enough for credit card companies to introduce a
new concept -- the $20 annual fee -- without inciting mass defections."

So this is an oligopoly, and behaves accordingly. Of course it charges sellers
extra, charges high interest rates, and all that other shit; they don't allow
more entrants into their market.

------
alecco
Many of us would love some digital money/payments/savings/loan fair system.
There has to be some way for a startup to turn bigger than Google just with
that.

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newmediaclay
What it boils down to is that Kahr is just a great businessman. He understood
what people wanted, gave it to them and tied in a great revenue model that
didn't scare people away.

He did this by truly understanding his target customer and their risk/expense
threshold.

------
JackWhite22
Credit Cards shouldn't be allowed in this world.

