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View Diary: Obama vs. Usury?  Why Not? (Updated) (251 comments)

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  •  I will say this, credit card companies do take (9+ / 0-)

    a lot of losses, but they are statistically computable. I haven't actually done the math, but we shouldn't make it impossible for a credit card company to make a profit. It may be 15% is too low, maybe not. But, as I said, profits could be computed over the range of interest rates and a maximum interest rate can be mandated which, in most years, would return a reasonable profit.

    •  the perversity (28+ / 0-)

      comes from the fact that they don't want to make profits from people who can pay, and pay on time, but from people who can't and shouldn't have been offered easy credit in the first place.

      "It takes two to lie. One to lie, one to hear it." Homer Simpson

      by Euroliberal on Sun Mar 29, 2009 at 11:52:50 AM PDT

      [ Parent ]

      •  That's not entirely true, but accurate as (9+ / 0-)

        an outcome. Those folk are also the source of most of the charge-off and bankruptcies. Do you think the risk they pose should be disregarded?

        But do you think there are a class of people who should never be afforded any credit? While the CC companies are in it to profit they do make credit available to some that aren't be good risks. That, I believe, is actually a public service. They do take chances on iffy loans and they do so because there's a reasonable chance that its not a losing bet.

        But, seriously, I'm feeling a little bad about defending the CC companies. I certainly feel like they could be much better corporate citizens.

        •  Not at all (7+ / 0-)

          But do you think there are a class of people who should never be afforded any credit?

          The CC companies know exactly how much and to whom they can extend easy credit. They just don't follow their own policies. If they can change a bankruptcy law why bother risk assessing.

          "It takes two to lie. One to lie, one to hear it." Homer Simpson

          by Euroliberal on Sun Mar 29, 2009 at 12:23:31 PM PDT

          [ Parent ]

          •  You are mistaken (8+ / 0-)

            Good credit payers and risks are finding that their credit card interest rates have been raised to between 23 to 30%.  The credit card companies aren't required to have a reason to raise the rates.  They just can.

            I think that the credit card companies and banks see regulations on the horizon and they are gouging the consumer for every bit of profit they can make before this happens.

            •  I don't think I'm wrong. I work at one. (6+ / 0-)

              But you are right about interest rates. However, corporations, just like people, will take advantage wherever possible to make a profit. That doesn't make it just or fair, but that's the way things work unless they're curbed by government.

            •  No I'm not (5+ / 0-)

              Good credit payers and risks are finding that their credit card interest rates have been raised to between 23 to 30%.  The credit card companies aren't required to have a reason to raise the rates.  They just can.

              because I never made the contrary argument a.k.a we agree.

              My comment only dealt with the perverse business practice with regards to so called "bad customers" and how they prey on them.

              Like you said, they can be very profitable just milking good customers until they bleed. Apparently that's not good enough for them.

              They win rain or shine as long as they make the right political contributions.

              "It takes two to lie. One to lie, one to hear it." Homer Simpson

              by Euroliberal on Sun Mar 29, 2009 at 01:09:01 PM PDT

              [ Parent ]

              •  In point of fact... (3+ / 0-)
                Recommended by:
                itsbenj, Cassandra77, Euroliberal

                In the eyes of the bank, the bad customers are the ones who pay their cards on time and in full every month and who never exceed their credit limit.

                The good customers, the sweet spot as someone called them, just pay the minimum, get a late fee now and then, but keep paying and paying and paying. Eventually these good customers have paid more in interest and fees than they borrowed in the first place.

                The credit card issuers have a third customer class. This class includes deadbeats and outright thieves. But the credit issuers decided it was not worth their while to pre-underwrite customers to deny a card to these folks. It was easier to pass their bad debts to the folks who pay their bills.

                •  Re (0+ / 0-)

                  In the eyes of the bank, the bad customers are the ones who pay their cards on time and in full every month and who never exceed their credit limit.

                  False. See my diary.

                  •  I did read your diary, and (2+ / 0-)
                    Recommended by:
                    itsbenj, Sparhawk

                    it describes what should be true. Whether it is actually true in practice is debatable.

                    When you use your Mastercard in a Walmart store, Walmart is assessed a fee. If you swipe that same card at a local non-branded gas station, that gas station is also assessed a fee, but not the same fee as WalMart. If you use the same credit card on the internet, again a different fee is assessed. The actual fees that are charged in any given situation are based on the free market and the relative risks involved. WalMart is probably in a position to negotiate a much lower fee than an independent gas station. This is a hidden fee that, in the end, the card holder pays whether he is a "good" or "bad" customer.

                    The "bad" customer under my definition, is not paying finance charges. And that is the crux of the matter.

                    •  Huh? (0+ / 0-)

                      You never actually refuted my point.

                      •  I gathered that your point was (0+ / 0-)

                        that credit card companies liked customers who paid off their balance every month on time and never exceeded their credit limit. I, on the other hand, labeled these none finance charge paying customers as "bad" customers in the sense that the credit card issuers do not make as much money off them.

                        I may have misinterpreted your previous diary, and if I have, I apologize. However, I would ask you how much a credit card company would charge for its services if everyone paid their full balance off every month, never had a customer incur an over limit fee or late fee. I do not think credit card issuers would be happy if their income was just limited to fees charged unless they raised them to a point where "bad" customers decided to cancel their cards and use cash

                        •  I told you... (0+ / 0-)

                          ...CC companies and banks make 1.5%-2% on every transaction that is ever processed, no interest, no fees, nothing. If you buy a $100 item and pay the balance off that month, the CC issuer makes $2 or so.

                          If a person charges $1000 a month and pays it off that month, the credit issuer makes 2% or so a month, which equates to $240 per $1000 invested. This is very profitable; CC issuers don't need the interest or fees, and often prefer that they not be charged because they equate to a default risk.

                          •  American Express tried that business model (0+ / 0-)

                            It did not work out well in comparison to other credit card issuers.

                            You may be privy to insider financial data on the banks that offer credit cards. But it seems to me there are costs associated with processing credit transactions and maintaining the networks and computers throughout the world, not to mention the costs of billing and collection and the cost of capital associated with paying the merchant in advance of receiving payment from the purchaser. You also ignore the costs of getting more credit card customers to maintain or increase cashflow. So saying they 'make 24% on the money invested' is a trifle misleading.

                            But, if I just accept what you say, why would they entice credit card holders with teaser rates of 0% or 2.99% to promote borrowing money. Why would they bombard me with checks to encourage me to use as much of my credit limit as I can? Why does DiscoverCard refund up to 1% of my purchases and in some cases 5% of my purchases? They are banks that make their money by lending money at interest.

                            Oh, by the way, why wont Macy's give me a 1.5% discount if I pay cash? According to you, they would be ahead of the game by 0.5%. There is a gas station down the street from me that gives me a 10 cent per gallon discount if I pay cash. Why not Macy's?

        •  I feel worse about your defense of cc companies (1+ / 0-)
          Recommended by:
          itsbenj

          Yes you can say the risk blah blah blah...

          There are so many horrors that they do that some small defense means nothing. They have nasty tricks that have nothing to do with the risk they are taking.
          People who have never been late at paying a card are still seeing their rates spike with that card...so suddenly they ARE in financial trouble.

          They are being worse than ever now and yes I am sure their losses are greater now. I feel zero pity
          There are so many stories of things like peoples credit limit being lowered weeks before they get a letter notifying them and so they go over the limit and get those consequences...or suddenly their ratio of credit to available credit is altered to the degree that all credit cards interest rates go up...even if they have not missed any payments

          The lower a persons' income the likelier they are to get this kind of crap and what they were able to handle becomes impossible to handle.

          I know all the stuff about "Well they shouldn't use credit cards" or whatever our moral judgments about it, that's beside the point when it comes to this. Some are forced to, some just want to. Either way if they didn't break the rules agreed on terms shouldn't change, they shouldn't be forced into ruin.

          And if regular citizens are stupid to build up debt (that they are able to pay for under their terms) how stupid are credit card companies to give people the cards to begin with?

          You say

          They do take chances on iffy loans and they do so because there's a reasonable chance that its not a losing bet.

          I say %**##$^**&!
          Do they warn people "Your credit limit is $XXXXX.oo but if you even go near there we will raise your rate"? and so on...
          They take the chances because they think there is a reasonable chance that they will be able to be predators and really can get blood from a turnip.

          •  don't worry (0+ / 0-)

            its a racket, you're just debating with someone who works within the industry, and probably thinks that their fellow co-workers are as honest and straightforward as they are. sadly it is not at all the case.

            Terry Gross: So, why do you have an Afro?

            ?uestlove: Because I'm secretly a Chia-pet.

            by itsbenj on Sun Mar 29, 2009 at 05:13:57 PM PDT

            [ Parent ]

      •  Banks profit fine... (4+ / 0-)

        ...from folks who pay on time, the fact that they don't want these people is a myth. These people are actually very desirable to credit issuers.

        Credit vendors charge a discount rate of 3-4% to the merchant, about half of which the bank gets.

        If I charge $1000/mo and pay it off every month, I get 1.5%-2% of that per month for a total profit on that $1000 of 18%-24% per year (minus expenses and overhead). This is a very statistically safe profit of 15-20% easy money without charging the customer a cent in interest. Any credit issuer would love to have a lot of people who charge up moderate balances, but pay them on time every month.

    •  I work for a Federal Credit Union (16+ / 0-)

      and we are capped at 18% interest on any loans or credit cards. Our credit card portfolio is our most profitable product and most of our cardholders are paying between 9.9% and 13.9%. It can be done with careful analysis of risk and credit limits.

      And if lil' ole' us can do that, certainly the mega-banks have enough brain power to figure it out.

      Of course, the flip side is there will be a lot of people who will not be able to get credit cards. Think back to the good old days when people's applications for credit cards were actually denied. We're going to be there again next year when Reg Z takes affect.

      The issue is that at a certain credit score level, the industry knows 50% of the people will be delinquent and may default. Unfortunately, no one knows which 50% will pay and which 50% won't. So without usurious rates to mitigate losses (in essence having the 50% who do pay make up the difference on the 50% who don't), they will just be denied cards.

      They always say time changes things, but you actually have to change them yourself. - Andy Warhol

      by 1864 House on Sun Mar 29, 2009 at 12:47:51 PM PDT

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      •  And is that a horrible thing? (6+ / 0-)

        I remember secured credit cards - you got a card only when you deposited a set amount into an account with them. Your limit was that amount. If you missed a month, the payment would be deducted from your account.

        If you made your payments on time, and didn't go over your limit, the limit got raised. After a while, you would build up a decent credit rating AND learn better how to manage your money.

        Could you charge a lot? No, of course not - but really, if you only make $20k/yr, should you be buying a ton of stuff on credit?

        •  Maybe not... (4+ / 0-)

          I'm not saying it's good or bad. It just is.

          No one will disagree that the best way to use a credit card is as a payment tool, with the entire balance being paid off every month. That's what I do. But I make a decent salary and have savings and I know that is not the case for everyone.

          I think low limits might be the answer. There are times when people need to buy something they don't have the cash for today. And I do mean need, not want. Like when the refrigerator dies. Or the clinic insists on payment for the last bill before they treat your child again. Or your mom is dying and you need to by an airline ticket to go see her. Or the car desperately needs brakes and you need the car to get to work.

          I do agree that your credit limit shouldn't be more than your annual salary, which has been the case more often than not in recent years.

          They always say time changes things, but you actually have to change them yourself. - Andy Warhol

          by 1864 House on Sun Mar 29, 2009 at 01:47:08 PM PDT

          [ Parent ]

          •  right (1+ / 0-)
            Recommended by:
            1864 House

            the sentence "if you're only making 20K/yr, should you be buying a ton of stuff on credit" is basically a tautology. if you only make 20K/yr, one is that much more likely to have to use credit, for regular everyday things, as opposed to fancy vacations & gadgets. this is not difficult, folks.

            Terry Gross: So, why do you have an Afro?

            ?uestlove: Because I'm secretly a Chia-pet.

            by itsbenj on Sun Mar 29, 2009 at 05:16:11 PM PDT

            [ Parent ]

    •  Explain something for me. (8+ / 0-)

      Department stores here in Canada routinely charge something like 28.9% apr.  They say they need to charge such a high rate because of the high costs of extending credit to customers.  So far so good.
      Now, everytime a customer attempts to pay with cash, the cashier offers 10% off to apply for the store card on the spot.  Every time!  I am currently in a mexican standoff with a cashier who insists she has to ask me to get the card every time, even though she knows I don't want the damned thing, and that it peeves me to be asked ad infinitum.  (aside: I don't complain to the manager because I don't want to put at risk anyone's employment, even if that person is a huge annoyance to me.  I just want her to quietly stop asking me.  End of digression.)
      So which is it?  Is it a huge financial burden to offer these retail cards, or is it a cash cow?  It doesn't pass the smell test to me.

      •  The clerk is likely telling the truth and her job (2+ / 0-)
        Recommended by:
        1864 House, bushondrugs

        would be in jeapardy if she quit asking.  Some stores are now giving "gifts" of some sort if the clerk fails to ask you if you want to apply.  They could care less how annoyed we all get, cuz they're making so much money on the cards they can afford to lose a customer here and there.

      •  They get paid for asking. (2+ / 0-)
        Recommended by:
        quotemstr, 1864 House

        Sears always give 10% off if you apply for a credit card. Sears gets a commission for signing people up. I think Citibank actually issues the Sears branded Mastercard.

      •  Cash cow (3+ / 0-)

        in two ways. They get the interest but more importantly, they don't have to pay the interchange that would be going to the card issuer.

        Visa, MC, Amex, Discover all charge a percentage of every purchase (called interchange) plus a set transaction fee and split it with the issuer (bank, credit union). It is deducted from the purchase amount. So when you charge $100, you pay $100, but the store gets $95. If you use a department store card, the store gets to keep that $5 that would go to the card issuer and the card company, though the store will still pay a merchant processing fee to handle the transaction, so they maybe get a total of $99. Multiply that $4 for every $100 sold and it adds up.

        And the clerk's job probably depends on selling a certain number of cards each month.

        They always say time changes things, but you actually have to change them yourself. - Andy Warhol

        by 1864 House on Sun Mar 29, 2009 at 02:43:23 PM PDT

        [ Parent ]

    •  limiting the interest rate (1+ / 0-)
      Recommended by:
      1864 House

      wouldn't eat into their profits, assuming they've sense enough to not loan irrespnsibly, i.e., to college students.  

      they need to take responsibility for their part in all the charged-off bad debt they've incurred by extending credit to practically anyone over the age of 18.

       

      "Government, like dress, is the badge of lost innocence; the palaces of kings are built upon the ruins of the bowers of paradise." Thomas Paine, Common Sense

      by Cedwyn on Sun Mar 29, 2009 at 01:26:22 PM PDT

      [ Parent ]

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