aTypical Joe: a gay New Yorker living in the rural South

Friday, March 09, 2007

Credit cards, control & self-control

I canceled a credit card with a $35,000 credit limit the other day. I was surprised that Wachovia put up no argument. I shouldn’t have been; I pay my bill in full every month.  They don’t want customers like me no matter how many solicitations they send:

In 2005, Congress gave the credit industry what it wanted:  tighter bankruptcy laws.  In 2006, the credit industry responded by mailing out 8 billion credit card solicitations--up 30% from 2005.  Larry Ausubel and others predicted during the debates over the bankruptcy laws that if Congress made it tougher to go bankrupt, then lenders would engage in riskier lending as they tried harder to get people to borrow. 

What kinds of risks are the card companies willing to take on?  With about 110 million households in the US, that’s about 73 card offers per household.  If the average card offers is about $5,000 in pre-approved credit, that about $365,000 in offers for every American household--or about $1000 a day, every day of the year. 

By comparison, median household income is about $46,000, or about $127 a day.  It wouldn’t be unreasonable to speculate that many families are offered about seven times their annual incomes in credit card debt… If debtors have no bankruptcy option, Ronald Mann points out that creditors can keep them in the sweat box longer.  Perhaps if bankruptcy were outlawed altogether the mailings would go to 16 billion, and if debtors’ prisons were reinstituted, could the mailings top 25 billion?  Ah, the possibilities.

A Senate hearing this week suggests that congress might take action:

An Ohio man whose $3,200 credit card debt mushroomed to $10,700 with interest and fees told his story Wednesday to senators, who denounced the industry for confusing billing practices and shifting interest rates.

Executives of three major banks defended their credit card practices as responsible and responsive to consumers’ needs in testimony at the hearing of the Senate Homeland Security and Governmental Affairs’ investigative subcommittee. Those from Citigroup Inc. and Chase Bank USA said their companies were eliminating some practices - including the one that hit Wesley Wannemacher of Lima, Ohio, with over-limit fees on his Chase card account 47 times although he went over his credit limit only three times. [...]

Wannemacher used a new Chase card in 2001 and 2002 to pay for expenses mostly related to his wedding. He had $3,200 in purchases, interest charges of $4,900, 47 over-limit charges totaling $1,500, late fees of $1,100, for total charges of $10,700 as of February. He paid $6,300, leaving a $4,400 balance - which Chase agreed to waive after he contacted the subcommittee staff.

The credit card CEO apologized at the senate hearing. How sincere. To those who suppose that the issue is one of personal responsibility and self control, Angie Littwin has posted a paper, ”Beyond Usury:  A Study of Credit Card Use and Preference Among Low-Income Consumers” looking at how they use and think about credit cards:

The participants in my study...were frustrated and angry at their credit-card companies, but they still thought credit cards were a necessary financial tool.  It turned out that the issue they were most concerned about was not high interest rates in of themselves but rather the temptation to spend and borrow at those rates, even when they knew they would regret it.  The discussion then shifted to how to redesign credit cards so that consumers could better control their temptation response to them.  In the paper, I build off their ideas to develop a proposal for “self-directed credit cards,” which would allow consumers to pre-commit to set levels of credit-card usage and avoid the temptation to spend or borrow more in the heat of the purchasing moment.

If I were king, I’d require companies to offer such an option to all of us.