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

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A Personal Illustration

May 15, 2009 at 3:30 pm (By Maxwell James) (, , )

Of what led us to today. Wow.

(H/T McArdle)

~ Maxwell

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