And the Responsible Get Punished
May 21, 2009
– Comments (19)
Are you generally a financially responsible Fool?
If so, the United States Congress, and President Obama, are looking to punish you -- all in the name of keeping 'evil' credit card companies from 'taking advantage' of your poor, unsuspecting, less financially responsible fellow citizens.
Recently, congress passed a bill that, "... fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk.”
Let me repeat: restricts the ability to price credit for risk.
Want to make an unsecured loan? Sorry, Mr. Banker, you're not allowed to look at that borrower's credit score, history of defaults, banruptcies, or anything else that might tell you how risky a borrower that person is when deciding what interest rate to charge. Never mind that it's a fundamental concept behind all borrowing -- and the reason why my home state of California is having trouble finding people to buy it's short-term revenue anticipation bonds at a reasonable interest rate.
No, you've been evil and bad by charging financially irresponsible people (okay, some people get into trouble through no fault of their own due to sudden catastrophic medical bills, for example -- but I'm talking about the financially irresponsible here) higher interest rates than those of us who always pay all of their contractual debt obligations on time.
Think about this a second. I have an acquaintence who recently purchased a new car (his prior vehicle was totalled in an accident - fortunately nobody was injured). This person has always been in financial trouble, has constantly lived above his means, and has a credit score in the 500's to prove it. When he told me what interest rate he was being charged on his new car I almost fell out of my chair... but then again, I understand it. The fact is, the lender sees my acquaintence as a greater risk than the lender would see me, for example -- and priced the loan accordingly.
With credit cards, that's about to change.
What this means for financially responsible people is that the money the credit card companies used to charge high-risk borrowers will have to be made-up somewhere (you guessed it, likely in the form of higher interest rates and fees for those of us who represent lower default risks). Of course the other option is for credit card companies to simply deny credit to people who they used to offer credit to (at higher rates) -- but my guess is we'll likely see some of both.
I have to admit, the credit cards I have in my wallet have been a pretty sweet deal. On one, I get a rebate whenever I purchase gasoline. On another I get some small percentage of all my purchases returned to me via a check at the end of the year. Maybe some of you get airline miles, or some other goodies. None of the cards in my wallet has an annual fee, and I always pay my entire balances on the due date, and have for years, so while the interest rates on the cards in my wallet are lower than some, it hardly matters since I never pay any interest.
And thanks to this congress who doesn't seem to understand the basic financial principle that risk and return should go hand-in-hand, my 'sweet deal' may soon change.
Make no mistake, I think credit card companies can and should do a better job than they have been at being transparent and informing borrowers in clear, plain English exactly what all the fees are, and give them adequate notice if any changes in terms or fees (I mean who really reads all that fine print?). I have no problem at all with the privision of the bill that requires statements to be mailed three weeks before the payment due date (one department store card my wife had years ago was notorious for mailing the statement so late it was difficult to pay the bill on time, even if we mailed the check the day after we received the statement -- we've long since closed that account).
But prohibiting lenders from pricing loans based on risk? I can't think of a more profound intrusion into free capital markets.
Credit cards have been a great convenience for me, and I've loved those 'freebies', and it irks me that this may change as the result of this congressional stupidity.
Make no mistake, I'll certainly shop around if the companies whose names appear on the pieces of plastic in my wallet try to change the deal on me -- and you should too. I may even eschew credit cards altogether if I have to -- perhaps keeping one and only one for emergencies and using my check card for everything else. No, it won't be as convenient -- and I might not get as many freebies, but I guess that's the price that the financially responsible among us have to pay in order to protect the financially irresponsible from themselves.
I guess with the bailouts of AIG (and everyone else) I should have seen this coming. It's not like rewarding financial irresponsibility is anything new to our government, is it?
Regards,
Russell (a.k.a. TMFEldrehad)
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