Greetings, Kos world!
In the diaries recently and even in some on the rec list, I have noticed commenters promulgating myths about credit cards and credit card companies. While I am not a huge fan of credit card companies either, some of the information that has come out here has been just plain wrong, and I thought I would set the record straight by posting and demolishing some myths about credit cards.
Credit card companies want you to pay 30% interest
The 30% "default rate" interest rates are implemented by credit card companies in order to force one to pay a balance down as quickly as possible, either by paying it out of the borrower's own funds or balance transferring to another card. They do this because for whatever reason, the borrower is considered a default risk (something that their statistical models are pretty good at estimating), usually because of a missed or late payment, payments coming back NSF, or other elements that credit card companies consider dangerous.
For those who do not think this is true, consider this: if you have credit cards at 6%, 10%, and 30% interest, which one are you going to pay off first? A credit card company that wanted to keep you "on the hook" would be competitive with those other issuers, not make themselves grossly uncompetitive. No credit card company wants someone paying 30% interest on their balance sheet; they think you are a risk and want you to pay off your balance as quickly as possible.
For those who say "doesn't raising the interest rate to 30% just make it harder to pay?" Well, yes, it does, but it also motivates you a lot more to find a way, any way, to pay the balance off. Remember also that when one gets a credit card, they give the CC company blanket permission to do exactly this.
Credit card companies think that people who pay off their balance every month are "deadbeats"
This is a pernicious myth that never seems to die. Credit card companies and banks charge something called a "discount rate" to merchants who accept payment this way. This rate is something like 3-4%, often split between the actual payment vendor (Visa, etc) and the bank that the card is ultimately backed by (these organizations may, or may not, be the same entity, but usually are not).
If I'm a bank and I service a credit card customer who pays his balance off every month, I get 1.5% to 2% per month on that customer's purchases, giving me an 18% to 24% profit per year, having made zero interest from the customer. This profit is very safe and is comparatively secure from default, because the outstanding balance at any time is small. This is very desirable for banks and credit card companies. Customers who run balances may (and in this environment, probably) do not have the actual cash available to pay the balance off, a precarious situation that may result in default if the customer has any kind of other problem. This situation makes credit issuers very nervous!
Customers who pay their balances every month are more or less gold to credit issuers. The issuers can make moderate profits at low risk, and these customers also do not take up customer service time calling complaining about interest rates or fees, or legal services in the event they have to be sued.
How they calculate FICO scores is a complete mystery, and FICO scores are meaningless anyway
FICO scores are a predictor of one's likelihood to default on financial obligations based on one's past behavior and based on generic empirical studies of large groups of people based on broad statistics. Despite entire industries who are trying to convince you otherwise, having a good FICO score is simply not very difficult. Don't be late on or miss payments on credit cards, car loans, or mortgages. Don't be running large credit card balances or other debt. Don't have a foreclosure or file for bankruptcy.
While some activities like credit inquiries and closing credit cards will ding you slightly, it simply isn't that much. If you don't have a pattern of being delinquent on financial obligations, these issues will most likely not be a problem for you.
While it is not true in every case, in general, past performance is a good predictor of future performance. People who tend to have been bad credit risks in the past are probably bad credit risks in the present.
The government can pass a law restricting credit card interest rates or terms
The government can, of course, pass almost any law it wants. But if you think that your 30% credit card is going to magically become a 10% credit card, it won't and can't.
No one can be forced to lend money to anyone (see the recent TARP bill and accusations that the money wasn't being lent out). If credit issuers do not feel that their risk is being appropriately compensated, they will simply take their ball and go home. The result will be that tens of millions of people with marginal credit will be denied a credit card under any circumstances, and credit cards will only be available to people who are rich or who have the very highest of FICO scores. Again, let me reiterate: no one is forced to lend money to anyone.
The government passing laws restricting credit card terms will simply deny credit cards to marginal credit seekers. The more restrictive the terms are, the fewer people will ever get a credit card, the result being much less consumer credit in the economy. For those of you who have posted complaining that cutbacks in consumer credit have negatively affected businesses, consider carefully the result of this kind of policy.
I have to also comment here on some hypocrisy I see on lefty sites in this matter. People are very upset that credit card companies have been so profligate and irresponsible; they get so many offers in the mail, my college kid got a card with a $5000 limit, etc etc. However, when credit card companies finally, at long last, become more responsible, these same people complain bitterly because their own credit lines are cut back and interest rates raised, but this is a natural consequence of "more responsible" credit issuance.
Credit card companies are evil
Credit card companies are simply companies that provide a service in exchange for a fee, like all companies. They certainly aren't freedom-loving, patriotic institutions who are benevolent and all-wise, but they aren't pure evil either. Like all companies, they are out to make a buck and will do what they have to do in order to protect what they perceive to be their political interests. But (in my opinion), I've seen little evidence that they are out to "screw" consumers any more than other companies in other lines of business are.
Those who choose to do business with credit card companies also choose to accept their terms, which really are fairly standard between issuers. Credit is a tool that can be used or abused, and those who run credit balances should be aware of the terms of revolving credit.