Why are credit card companies being demonized for charging high rates?
I have a lot of problems with how banks and credit card companies have been run over the past several years. Heck, two of my best active CAPS picks are shorts of Capital One (COF) and Discover (DFS), which have dropped 72% and 55% respectively since I gave them the old thumbs down.
Having said this, and I'll probably receive a number of virtual boos for taking this stance because bashing credit card companies is all the rage right now, but I don't see what the big deal about them charging high rates and fees is.
First of all, anyone who carries a balance on a credit that charges double digit interest rates is an idiot. I use credit cards all the time. I rarely pay cash for anything, but I never, ever let my balance roll over. Why on Earth would I pay fifteen or twenty percent interest on a short term loan? If I have to do that it means that I can't afford whatever I am buying. I feel bad for people who run into legitimate financial troubles, but if they have to resort to buying things on a credit card and letting the charges roll over then they didn't save enough money for a rainy day.
I have absolutely no sympathy whatsoever for people who buy 50 inch flat screen TVs or fancy clothes on their card and carry a balance. Don't make all sorts of discretionary purchases that you can't afford and then start whining about the fact that you have to pay a high interest rate on them. Consumption is a privilege that you earn by working and saving, not a right.
Now one can argue that consumers are stupid and they don't realize that credit card companies have the right to change the terms of their short term loan whenever they want to so there should be better disclosure in the industry. I have absolutely no problem with that, but I do have a problem with placing restrictions upon what credit card companies can charge.
If I had money that I wanted to loan to someone I wouldn't want anyone telling me how much I could charge. I'll charge whatever I want to and if you don't like it, fine I have no problem with that...don't borrow from me. If the rates that credit card companies charge are too high than people will eventually stop borrowing from them and the companies will either have to issue fewer loans or lower their rates and fees to what the market dictates. That's how a free market is supposed to work.
Articles like this one in today's Washington Post annoy me to no end: As Recession Deepens, Even Credit Cards' Minimums Can Become a Burden. Why am I as someone who was responsible, doesn't have a new TV, buys his clothes on sale, doesn't eat out every night and run up a huge credit card balance supposed to feel sorry for someone who rang up a huge debt and is idiotically only making the minimum payment on a loan that has terms that would make loan sharks proud?
I'm very curious to see what sort of new legislation for credit card companies gets passed by the Obama administration in the near future. The legislation as it is currently proposed would "stop credit card issuers from imposing arbitrary interest rate increases and penalties." What exactly is arbitrary? If someone has money and loans it out why can't they charge whatever rate they want? If you don't like the terms of the loan...don't borrow from them.
I was against giving bailout money to credit card companies, but I can see the reason why it was done. Americans have become too dependent upon credit cards. If these companies crumbled it would be absolutely disastrous for the economy in the short run. However, it bothers me that the government feels as though it can now dictate how these businesses are run and feels as though it can mandate that they become less profitable just because it gave them money. Government interference in private companies is a dangerous road to head down.
It's actually pretty funny that the government would shoot itself in the foot like this. On one hand it's loaning money to credit card companies so that they can continue to operate while at the same time it is attempting to limit how profitable they can be which will make it harder for them to pay the money back. That's typical government for you.
Oh well, I don't have a lot of skin in this game anyhow. I'm only short COF & DFS in CAPS and have a small position in AmEx bonds in real life, but I just don't understand why credit card companies are being villainizedand everyone automatically feels sorry for the idiots who spend more money than they can afford. That sort of thinking is what got us into this mess.
Am I way off base here? I'd love to hear others thoughts on this subject.
Obama to prod credit card firms on fee practices