Playing fair takes two
In an editorial in today's Columbus Dispatch, Sen. Carl Levin, D-Mich., and editors take credit card companies to task for raising the interest rate of certain cardholders. Sure, it's always easy -- and politically effective -- to attack big business, but Levin and the Dispatch editors missed the other half of the equation: the cardholder.
Here is the issue: An applicant for a credit card fills out an application -- a contract -- that specifies certain conditions. One of those conditions is credit worthiness. During the application review process, the bank checks the credit scores of the applicant. The assumption is that the applicant will maintain his relative credit rating and not enter into agreements that will negatively affect his credit scores. Based on credit scores and other information, the bank agrees to issue a credit card -- with a specified rate of interest -- to the applicant.
At some point after the credit card is issued, the cardholder's credit score declines for some reason. The bank, in order to protect its investors, raises the interest rate on the credit card. The cardholder and politicians cry foul. The politicians claim that the bank is unfairly punishing the cardholder, never mind that the credit card agreement specifies that interests rates may rise if credit scores fall. Regardless, this is but one side of the equation.
The bank on the other hand sees a cardholder who has reneged on his agreement with the bank. How? By doing things that negatively affect his credit rating. Maybe he takes on additional debt or starts to miss payments. These actions justifiable lower his credit scores and raise his credit risk. Yet, he expects the bank to continue pretending that he is still relatively credit worthy, and in the same financial situation as the day he applied for the card.
In essence, the cardholder reneges on his agreement to maintain a relative credit rating, and then blames the bank for taking necessary action.
Isn't it time for some folks to grow up and take responsibility for their actions? Isn't it time for government to quit rewriting contracts that were agreed upon by entities under neither threat nor compulsion?
There always is two side and two tales to tell. In this case, government is wrong once again.
Comments (22)
Firstly: "Isn't it time for government to quit rewriting contracts that were agreed upon by entities under neither threat nor compulsion?" You make it sound like this happens all the time. Does it? Doesn't seem like it.
Secondly: doesn't the card company have the right to lower and raise the interest rate when ever it feels? Your example only shows one reason they raise interest rates. But, they don't need a reason. And many (probably most) times they raise interest rates completely seperate from your reason. They do it to keep cardholders in debt which brings in more money. That also is one way to keep investers happy.
Thirdly, you say, "There always is two side and two tales to tell." But then your pull a 180 and retort the old worn out line "In this case, government is wrong once again." Making it sound like its always the governments fault. Of course though on the other side it isn't (to use your reasoning).
Published: December 12, 2007 10:28 PM
They might also raise your rates to compensate for those who default.
Published: December 12, 2007 11:20 PM
Umm, Mike, follow the news for a few years. It happens all the time.
Cardholders don't have to sign up for the card. They can always pay off the ENTIRE balance and close the card. Did I mention balance transfers?
At least TRY to read some economics on this site before you start commenting.
Published: December 12, 2007 11:20 PM
The blog entry only gave one reason they raised interest rates. My point was that they can do it for many and any reason. So yes there are many reasons like default. As it stated. --------- Can you give me examples when it happens all the time, brent? Not that it doesn't. If a person doesn't sign up for a card they can't be a cardholder so your statement "Cardholders don't have to sign up for the card." doesn't make any sense. Their not considered a cardholder till they sign up. But thats trivial.
Published: December 12, 2007 11:33 PM
..But anywho, its an interesting site with some interesting ideas.
Published: December 12, 2007 11:40 PM
Yes, government re-writes contracts everytime it makes a law saying "such and such a contract is illegal".
Let's say I rent an apartment and I have a lease that says I can't have guns inside the building, then the government passes a law saying that apartment's must allow tenants to store guns. My original lease contract is now partially voided.
It happens all the time.
Published: December 13, 2007 1:34 AM
Mike,
Government can rewrite contracts simply be threatening to "tighten the screws" as the editorial notes. Note Bush and the subprime rate freeze which appears to be voluntary since we cannot see the screw that is slowly being tightened in the background.
Businesses inherently recognize the known evil (freezing rates) is usually better than the unknown evil (future laws, regulations, etc.), so they take the lesser of two evils. That is not voluntary action in a true sense.
The point is that the terms of the contract, including the fact that the bank can raise rates for any reason, are clearly stated. If you do not agree with them, then don't apply for the credit card.
In particular, a cardholder needs to protect his or her credit rating. Opening new lines of credit, taking on new debt, missing payments, etc., are real indicators of one's financial situation.
Once again, if you do not agree with that, don't take out the card.
As a matter of principal, do not knowingly sign an agreement, and then when the agreement is no longer in your favor, appeal to government for relief.
Published: December 13, 2007 7:32 AM
Jim writes: "Businesses inherently recognize the known evil (freezing rates) is usually better than the unknown evil (future laws, regulations, etc.), so they take the lesser of two evils. That is not voluntary action in a true sense."
Is it that businesses "take the lesser of two evils" or rather that the more powerful ensure that the lesser of two evils becomes the regulation? Freezing rates keeps out marginal and potential competition, right?. How do we know if big card companies are reacting to political action rather than driving the policy as a special interest?
In add, is the Fed Reserve partly to blame for the consumer's default? The average person cannot be held responsible for the uber elitist sophistry and resultant market distortions by said Beast.
It is one thing if Joe drove to that part of town and voluntarily purchased the services of a prostitute and then later ended-up with STD. It is another thing entirely if every place in town is riddled with prostitutes, unbeknownst to Joe. In fact, Joe, the dating man he is, doesn't even know that the woman he is out with is fee-for-service until well after the first kiss...
Of course, getting an STD through risky behavior is not really like credit card default even if the consequences are the same: they both ruin your credibility with woman.
Published: December 13, 2007 9:00 AM
"The bank, in order to protect its investors, raises the interest rate on the credit card."
Two points that could be raised are that the cardholder, who has continued to make his required payments on time, may feel the bank has no legitimate quarrel with him and should leave him alone, and that by raising his rates the bank has NOT protected its investors, it has in fact endangered them by making it more likely he will default on his loan.
Credit scores can be changed by the strangest things, many of which we are completely unaware of. I was startled to learn mine had declined because I was no longer using a Gasoline Credit Card. The fact that I was in BETTER financial shape ( I was now using a Company supplied Gasoline Credit Card as an increase in my compensation)had no bearing.
Published: December 13, 2007 10:38 AM
"The assumption is that the applicant will maintain his relative credit rating "
the contract should be for the original rate. and what "risk" do these companies face? they are billions of dollars away from any possible trouble and they are acting like they are the precipice of bankruptcy because one guy now is slightly riskier than he was a month ago according to them.
if they think the person is risky they should not give them the credit in the first place. they should be judged on their payments to the credit card company only.
if i were a credit card company, i would sabatoge peoplees lives and payments so that I could get more profits by raising their interest due to bad credit!
Published: December 13, 2007 5:05 PM
Lester,
Sorry, but a contract is what it is, not what you think it should be.
The cardholder agreed to the terms of the contract -- most credit card contracts stipulate that the interest rate be increased by the bank for any reason, at any time.
Don't like. Don't sign it.
Mike,
In your view, by raising rates, the bank is hurting itself. So what? Does that imply that government must intervene to protect the bank's investors.
I hear this line of logic all the time, especially with regard to zoning issues.
Mr. Zoning Official: We already have enough stores. This store, proposed by Mr. Mall Developer, is bound to fail. Therefore, we must deny his zoning application.
Thank goodness that Mr. Z. Official understands more about development than Mr. M. Developer. Otherwise, Developer would have lost his shirt on the proposition.
Parrotocacy,
We are held responsible for our actions; either by signing a contract or by being promiscuous.
Published: December 13, 2007 9:36 PM
Hey Jim,
I, like you, am opposed to government intervening in this matter. I also think the Credit Card companies are assholes for the reasons stated.
Published: December 14, 2007 9:00 AM
This is getting somewhat confusing because there are several of us mikes posting. I am mike of the last two posts, not the first.
Published: December 14, 2007 9:04 AM
Thanks for the reply Jim. I agree. Folks are responsible when not conscripted to sign a contract.
The Fed involves no contract.
Published: December 14, 2007 2:42 PM
Mr fedako- Now i see why there are paleo cons. WHo cares if the contract says something? people have the rational expectation that a contract is a normal contract, not one with secret fine print.
Published: December 14, 2007 3:46 PM
Lester,
Never sign a contract whuch you do not understand. Regardless, the contract stipulation for rate increases are usually not hidden in fine print, they are right there for the applicant to read.
Question for you: Do you think it is ethical to sign a credit card agreement and then purposefully take actions that lower your credit worthiness without letting the bank know of your increased risk?
What I am getting at it this: Is it always big business that is at fault?
Published: December 14, 2007 4:47 PM
"Playing FAIR takes two."
I'd like to approach this from a different angle.
I think most people would feel that if you are making your payments on time, it is not fair for the company to raise your rate because your credit score has changed. We are all compelled to say it is LEGAL for them to raise the rate, but it is not fair. The difference between fair and legal in contracts has been clear since Shakespeares Merchant of Venice.
Published: December 15, 2007 5:55 AM
Mr Fedako- from mikes post above
"I was startled to learn mine had declined because I was no longer using a Gasoline Credit Card. "
I don't think the credit card company shuold be privy as to whether or not I hold a gasoline credit card no.
the credit card company is free to break the contract if they don't want the increased risk of my not having a gas credit card.
my privacy trumps their risk
Published: December 15, 2007 8:52 AM
Mike and Lester,
The point of the original post is that there are two sides to any contract. No one will answer the question which I posed from the banker's perspective: Is it ethical for a credit cardholder to take actions which lower his or her credit worthiness after signing a credit card application without notifying the bank and accepting the consequences?
Also, privacy is only an issue between you and government, with one exception: when you sign a contract that guarantees safekeeping of your personal information -- your privacy.
An example: I occasionally participate in focus groups where my time and opinions are exchanged for cash. In order to participate, I must sign a waiver releasing any rights to personal information -- my so-called privacy -- obtained during the focus group. Yes, for $50, I am willing to forgo my so-called right to privacy (again, the right to privacy exist only between you and government).
That said, I do have a huge issue when government obtains my personal information through either legal or extra-legal manners. This offends me greatly.
When you sign a contract that allows the bank to share your financial personal information, you have no ethical reason to try yo get government involved. I would go as far to say that when you sign a contract that does not speak of the safekeeping of information, you are again out-of-luck. There is no right that protects you.
Look at it this way: Assume I am a house painter who is a member of an organization that includes other house painters. I have the right to share with my fellow painters that (say) you had passed me a bad check (unless we had a contract that stipulated I could not reveal such info).
Would either of you have an issue with house painters sharing such information? Is that "fair?"
Published: December 15, 2007 11:06 AM
Mike and Lester,
The point of the original post is that there are two sides to any contract. No one will answer the question which I posed from the banker's perspective: Is it ethical for a credit cardholder to take actions which lower his or her credit worthiness after signing a credit card application without notifying the bank and accepting the consequences?
Also, privacy is only an issue between you and government, with one exception: when you sign a contract that guarantees safekeeping of your personal information -- your privacy.
An example: I occasionally participate in focus groups where my time and opinions are exchanged for cash. In order to participate, I must sign a waiver releasing any rights to personal information -- my so-called privacy -- obtained during the focus group. Yes, for $50, I am willing to forgo my so-called right to privacy (again, the right to privacy exist only between you and government).
That said, I do have a huge issue when government obtains my personal information through either legal or extra-legal manners. This offends me greatly.
When you sign a contract that allows the bank to share your financial personal information, you have no ethical reason to try yo get government involved. I would go as far to say that when you sign a contract that does not speak of the safekeeping of information, you are again out-of-luck. There is no right that protects you.
Look at it this way: Assume I am a house painter who is a member of an organization that includes other house painters. I have the right to share with my fellow painters that (say) you had passed me a bad check (unless we had a contract that stipulated I could not reveal such info).
Would either of you have an issue with house painters sharing such information? Is that "fair?"
Published: December 15, 2007 11:07 AM
"Is it ethical for a credit cardholder to take actions which lower his or her credit worthiness after signing a credit card application without notifying the bank and accepting the consequences?"
no. but the mechanisms are in place so the bank IS notified. therefore, they can evaluate this information and choose to terminate their relationship with you.
They won't do this because then they would have no customers.
the reasons for this law are not to insure the company against a credit risk but to make more money from a kangaroo court risk analysis mechanism.
Published: December 15, 2007 2:08 PM
a better model would be the way insurance companies use points to determine your risk potential. they don't count things like parking tickets. I don't know the equivalent for a moving violatation vis a vis credit but surely cncelling your gas credit card would be more akin to a ...to nothing.
Published: December 17, 2007 9:35 AM