Where Credit Is Due

"Necessary" and "Evil" have always pretty much summed up my thinking on credit cards.

The passage on Tuesday of some mild regulations for the credit industry may be hailed as a breakthrough - all the dark muttering that banks wanted to stay unregulated strikes me as more sabre rattling than true - but the real credit card "reform" we have to go through as a nation is about us, the consumers. And because of that, I think the bill becomes the excuse that will drive a huge decrease in credit cards and credit card use.

And it won't be pretty.

Passing the bill - which seems to be mostly "you need to tell people before you rob them!" type rules - sort of guarantees that any talk of recovery is premature. Our economy has been fueled, for close to 30 years, by excessive consumption (cue "The Story of Stuff"), and that consumption, in turn, was made possible through easy credit. Tightening rules on credit cards, which in turn will reduce the availability of easy credit at absurd rates, basically guarantees that we can't shop our way out of recession (although my friend Jennifer is willing to shoulder that burden for many of us). :)

As you might guess, I haven't really been a fan, or extremely partisan when it comes to the credit card bill. Although I think some "rules of the road" would be helpful, I also think this is one area where government regulation looks more like meddling than medicine - force feeding specific interest rates, or specific approaches to billing, don't necessarily reflect a good understanding of how credit works, but more a kind of popularity contest to attract voters (we forced them to make your credit card candy tastier!).

Yes, banks charge high interest rates because they can; but they also charge them because they're giving credit to people who basically shouldn't have it. Really regulating credit, really asking hard questions... would involve admitting that giving cards with enormous five-figure limits to people with dicey payment histories and modest incomes is not good sense, or good business (much like issuing mortgages for unaffordable properties to people with no real indication of the ability to repay).

Unfortunately, Americans have grown too accustomed to "have it my way" notions of credit. The whining, lately, about abrupt changes from card companies in terms and interest rates is something I generally have little patience for. Just to mention Jennifer again she has a funny story about her Uncle saying, as a small child "you like it, you wear it" about clothes he didn't want. My reaction to credit term change complains is equal and opposite: don't like it... don't use it.

Putting an absolute cap on interest rates won't open up credit; it will guarantee cutting off credit to thousands, and probably millions, of bad risks, who get bad rates because of internal assessments of their (our) ability to repay. This is what happens when you boil life down to a math problem. You want a more "human" approach to credit... that's not going to be found in a bank transaction.

Indeed, real "credit reform", if we were serious. would probably focus on the part that's not being addressed: educating consumers about why high interest rates and bad terms are a sucker's bet, giving people the tools to realistically evaluate their ability to shoulder additional debt, and to determine how much, if any, credit they really should carry. It's easier to blame banks, foist some new rules on them, and mutter darkly about even worse punishments to come if they don't "shape up." A much easier way to make them "shape up"... cut up your cards. The more we - as consumers who don't rely excessively on credit - make it less profitable for them to make money on us... the more they will restructure their credit operations.

If we were serious. But really... we don't want that; we say - especially progressives, but even old money Republicans do it too - the banks are the bad actors, but really, when it comes to credit, too many of us have wanted to give up essentially nothing while getting everything we want, for free (a good lesson on policy in general, especially, say, as it relates to health care reform). From a bank regulation reform standpoint, the credit bill is probably nice, but largely useless. You get more notices, you get some time before credit rates are hiked... but really, you'll probably keep cards which raise your rates and penalize you for minor infractions.
That's what we do.

But the real price of even the mildest credit "reforms" is probably in our overall economy. There's a "good credit vs. bad credit" meme developing which says banks plan to focus profit-making on "good" credit holders (such as people who pay their bills, in full, each month, denying banks the interest payments that drive the operations), since "bad" credit types are now just headaches. It's a lovely story, but the economics are really clearer than that - the stomach for missed payments, and precarious positions has dropped and will drop further; and banks are going to cut loses and drop cardholders with obvious excesses - excessive credit limits, excessive payment issues, excessive debt. And in the process, they will guarantee no economic recovery this year or probably well into next. If we can't use credit to fuel a return to spending... we won't have the kind of economy we've had in recent years... which ran on it.

The instructive thing, this week, I think, when it comes to credit is that we all did "credit reform" on this mild scale so that the really hard topics could be put off. Yes, that means banks got to "get away" with "usurious" practices... but it also means there were very few questions, really, about where consumers need to pare down debt. That's how we like it. And our banks, and our government, are all too happy to oblige. Probably because...we built them that way, too.

Comments

[jinb]

Isn't this post another in the line of blaming the "other:" All those darn credit card cheats who just wanted the latest whatevers? A lot of people in credit card debt are there not for convenience or for wanting things but simply for trying to pay bills in this economy.
When we put such disparate value on different services (i.e. my admin. skills just aren't worth as much as those Wall Streeters who proved so invaluable in wrecking the world economy) we're gonna end up where we are now, with people turning to credit cards for things like medical bills and groceries.

Also, can we get a little disclosure here? All of your current bills are paid by you, yes? With cash and without any other assistance? Rent, food, gas, the symphony, etc, all done on a Starbucks salary?

Glass houses and all of that.

[weboy]

The specifics of my financial situation - or yours - is really not the point here; I was making a generalized observation about excessive use of credit, without really judging people's choices or motivations. I certainly get that, for many (me included) using credit to cover basics is sometimes a necessity; from an objective, planning your finances standpoint, that's not a good thing (because, basically, it's taking an enormous loan with a high interest rate for basic living). Those who can make changes to avoid such a situation, I'd suggest, should. Those who can't... are certainly not bad people, and in no way was I trying to suggest otherwise.

My larger point was that the problem with the "credit reform" plan is that it makes modest changes to business regulations, but doesn't ask, as you suggest, basic questions about why people rely so heavily on credit; and without making policies that actually encourage less reliance on credit... you won't necessarily stop people chasing bad deals... and worse, you won't save people when banks decide, as they are and probably will in increasing numbers, to simply cut off the option for many. When I say "people have lived beyond their means" I'm not saying people want to live like rock stars (though some may); what I'm pointing is basically simple math: if you can't cover your basic expenses with your salary, you're not existing within your means. That's a problem. We should - I agree with you - be doing more to address it.

[Leigh]

"if you can't cover your basic expenses with your salary, you're not existing within your means. That's a problem. We should - I agree with you - be doing more to address it."

I don't have as strong a reaction to this post as Jim (Hi Jim!) but if what I just quoted back to you is your point, then perhaps you should be talking about the stagnation of wages over 3 decades as the cost of living - particularly in terms of housing, education, & food prices - has risen, rather than about how we all need a "come to Jesus" about our spending habits. You do suggest a sort of national frivolity without raising the issue of real costs vs. incomes.

[weboy]

"perhaps you should be talking about the stagnation of wages over 3 decades as the cost of living - particularly in terms of housing, education, & food prices - has risen, rather than about how we all need a "come to Jesus" about our spending habits. You do suggest a sort of national frivolity without raising the issue of real costs vs. incomes."

That's why I have you. :)

Seriously - I don't use the word "frivolous" anywhere, and it's because I'm not judging the spending of others (as J says, I have, really, no right to do that). My point, as I said to him, is simpler: we are a nation living beyond our means. Is part of the reason for that wage stagnation? Absolutely. Is it also overzealous consumerism? Sure. The point of this post, really, is what has fueled our ability to ignore wage stagnation, and to pretend we have a problem, any problem - it's banks and their bad ways! - other than a problem with overuse of credit. If we plan to solve the credit "problem" by forcing banks to cut people off (which is the likely result of the bill), we will, as you suggest, put a number of other issues into stark relief. All I'm suggesting is... perhaps we'd have a better chance of addressing the income problem and the over-reliance on credit, if we actually discussed them. Instead we're punishing banks, and the net effect will be to punish ourselves, with few options for relief.

[Leigh]

I guess I'm not part of your collective "we," because in my circles it's all about wage stagnation and the rising cost of living.

[jinb]

it makes me wonder if there really is only a finite amount of money, and if there is a direct link between the excessive compensation of some and the stagnant wages for others.

We could call ourselves "wii-less we?"

[weboy]

This lively discussion - which, honestly, I never anticipated - tends to lead me back to my conclusions about the problems of credit that much more strongly. I think there are some interlocked problems here, which go to the increasing use of debt and credit to fuel the American way of life. I don't think you can, as Leigh suggests, make this simply about "wage stagnation and the rising cost of living" and ignore the credit card problem, or treat credit card debt as somehow merely a part of some larger problem; it IS the larger problem. Our debt, banking and foreclosure crises all stem from a culture that encouraged excessive debt. Had we not, as a society, encouraged ever increasing reliance on debt, issues of wage stagnation and ability to manage costs of living would have become an issue years (and years) ago, on a national level. That didn't happen - and still hasn't happened, really, I'd argue - because we came up with an artificial fig leaf - massive use of credit.

Then ttoo, I think the feedback is a reminder, to me anyway, that when we talk about financial troubles we do tend to review people's choices on a subjective scale; and the effect is to isolate those with serious financial issues as having "failed" or "messed up". We can't do the kind of foreclosure relief that's really needed, in large measure, because we're too busy picking who's in foreclosure for the right reasons, or the wrong ones. Arguably, tthe relief we'll need to provide in credit cards is even larger than foreclosure, certainly more widespread. And though I don't do it here, I do understand the visceral reaction to suggestions that saying "consumer debt is a problem" is somehow a judgment about the consumer or consumption hangs over it; that's a lot of what's out there, now. I don't like it either. But we can't begin to unwind the problems of excessive credit use until a) we can admit the enormity of it as a problem and b) we can stop judging people over it. I don't care why people are in debt or what hey bought... what I care about is... how do we change things?

My point remains, even in the face of the friendly blowback, that we don't have a good cultural answer for excessive reliance on debt. Without that - in other words without better education for consumers about the problems of taking on too much debt, better financial management and planning - we're really not changing behavior. People will continue to use credit, where they can, either out of perceived necessity or out of continued pursuit of consumerist goals, without a lot of concern for the consequences. And it's likely that many people will move into the category of too much debt.

And, still, rather than deal with the debt crisis - which is the real drag on our ever recovering out of the economic crisis we're in - our government tinkers, on the margins, with everything else. We expect banks, somehow, to forego a profitable business out of some moral appeal to decency; it's not in their financial interests to discourage credit card spend, nor is it in the interest of retailers to discourage purchasing on cards. That's our culture... and unless we change it, on a fundamental level, we're not changing anything. And while banks may use the "reforms" as an excuse to scale back credit somewhat, that doesn't address our larger problems... which is the point that I keep coming back to... because it seems like the important one.