The Change We’ll Pay For (Next Year)

May 19, 2009 at 2:37 pm (By Maxwell James) ()

Many readers of this blog probably remember a time, a little over twenty years ago, when credit cards all charged annual fees with standardized 18% APRs and no silly little freebies. That all changed in the late eighties and early nineties, when Capital One pioneered the use of computerized risk models in the industry. This allowed their company to offer customized cards with terms based on the individual credit history of card owners. This in turn led to a widespread burgeoning of the US credit card industry, as other companies followed suit, and large numbers of consumers previously ignored by the industry became credit card users for the first time.

Well, it looks like that period of history may be over. The US Senate just overwhelmingly passed a number of new regulations limiting the ability of credit card companies to make money off of credit card users who carry a balance from one month to the next. Which means that to survive, the industry will have to find a way to instead make money off of credit card users who do pay their balances off each month. That means a return to annual fees, shorter grace periods, and probably less credit extended to consumers of lesser means.

I have mixed feelings about this development. On the one hand, by making the bulk of its money off of consumers who were either cash-strapped or financially undereducated, the credit card industry has always been dancing on the edge of a knife. People who don’t have a lot of liquid assets, and/or who struggle to manage them, are always going to be a higher risk for default. And “responsible” credit card users who pay off their balances every month are probably never going to be worth that much to the industry. They’ve gotten used to having their credit cards for free, and if the terms change too much for their liking, will just stop using the cards. They don’t need them enough.

On the other hand, for people of lesser means to have credit at all is a very meaningful development in the history of the human race. You can make a reasonable argument that the extension of consumer credit in the developed world is of a piece with the breakthrough of microfinance in the developing world. Credit cards do fund a lot of wasteful purchasing, but they aren’t just used to buy “stuff” in the United States; they also fund start-up businesses all the time. Used carefully, they can enable people to fend for themselves while trying to live out their dreams. What could be more American than that?

At the beginning of this blog Rod asked if we have changed. Perhaps not yet. But this strikes me as a genuine harbinger.

~ Maxwell



  1. Rod said,

    To a certain extent, allowing the market to set the terms of credit will always mean higher interest rates for the less creditworthy, which contributes to their higher default rates. It is part of why most of us do not get prime rate on loans. To the extent standard interest rates are forced onto all loans, the lenders will either get tough about qualification, effectively denying credit to some segments of the market, or spread the risk by charging higher rates to good customers. If the lenders are forced to make loans to poor credit risks, the good credit risks will pick up the bill, one way or the other.

  2. Icepick said,

    What are the chances that Congress has read this legislation more thoroughly than they read (or didn’t read) the stimulus bill?

  3. wj said,

    No doubt the credit card companies will look at what risk they run compared to the amount that they are now allowed to make. And then simply cancel the cards of all those from whom they cannot make a return that balances the risk. So availability of credit will drop abruptly. (I foresee a return of the “red-lining” complaints of yore.)

    As one of those who routinely pays off my balances each month, I can say that if charges for merely having a credit card return, I will likely keep a maximum of 1 card. (Whichever one charges the least, obviously.) And if interest starts getting charged from date of purchase (as I have seen suggested elsewhere), I stop using the card except in case of emergency. Either cash or a check — of a debit card for places like hotels which insist. No way I pay 18% for convenience — it’s just cheaper to go back to carrying cash again.

  4. amba12 said,

    Credit cards are definitely two-edged swords, even if you don’t use them to cut lines of cocaine.

    How many times have you heard of someone raising the money to make a little indie movie or a demo CD off their and their friends’ credit cards? They’ve been used to start small businesses; they’ve also been used to keep many a creative type afloat while investing time in some quixotic (or not) art project. That may be a tiny slice of the market, but it would be interesting to collect stories of people who used them that way. And other ways.

    A Studs Terkel-type oral history as a farewell to the era of damn-near-universal credit — the tragedies and the triumphs. The affection, the addiction, the affliction, and the fear and hatred. Interesting book project. Call it “Plastic.” (I might as well be saying STEAL THIS IDEA, huh?)

    We have a friend who is a filmmaker from the former Yugoslavia. He basically shared our digs in NYC for a while during the ’90s (we had a studio with a skylight and were subletting the two studios next door at almost WWII prices from my longtime neighbors, a pair of extraordinary women who were in their ’80s by then and living in New Jersey for health reasons). We helped him get starter credit, and by using it carefully and cannily — getting low to zero introductory APRs, using one card to make payments on another — he deftly juggled a large debt, and built up a large reservoir of credit. Then, I wrote two books, with his collaboration, based on an idea he gave me, and split the proceeds with him. Eventually, he parlayed all this into buying an artist’s-special-deal apartment in the East Village, which he still owns though he is back in Belgrade. He also got his green card as a creative type, and he, his wife and kid are now U.S. citizens as well. He came from a Communist country; he had no compunctions about working a system, and was uninhibited and skilled in doing so. We should have taken lessons from him.

    I, by contrast, for reasons too complicated to go into here — money was a major pathology, symptomatic of other things, in J’s and my relationship — handled credit about as badly as it was possible to do, and had the experience of it being the small, toasty fire that eventually burns your house down.

  5. Icepick said,

    Credit cards are definitely two-edged swords, even if you don’t use them to cut lines of cocaine.

    ROTFL! If someone stole your idea for PLASTIC they should start the piece with that line.

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