The Critics and The Credit Card

Having more credit than money,
Thus one goes through the world.

- Johann Wolfgang von Goethe, Claudine von Villa Bella (1776)

It's
tough to be a credit card. Everyone worries about the consumer whereas
no one seems to worry about the credit card even though it is subject
to unending criticism. The cards' acts of kindness are legion and have
been written about in this space and elsewhere repeatedly. Indeed,
according to the New York Times,
in the first half of 2008, credit card companies graciously wrote off
more than $21 billion because of the poor economic situation of their
customers. Such generosity notwithstanding, two days after Christmas
the New York Times editorialized against what it described as "unfair
and deceptive credit card practices". It said credit card companies
"have stealthily adopted a variety of billing strategies that are
designed to maximize penalties and fees. . . ." and urges congress to
get involved and bring an end to those kinds of practices. The paper
fails to realize that most of the practices complained about are
nothing more than an attempt to instill in consumers a sense of
financial responsibility their conduct suggests is lacking.

There
are countless ways credit card issuers attempt to instill financial
responsibility in their customers. One is by penalizing them if they
incur too much debt. Ed Schwiebel of Gilbert, Arizona, offers an
example of how that works.

Ed had a card issued by MBNA. In
a conversation with this writer some years ago he said that he always
made the minimum monthly payment within a day or two after his bill
arrived. For many months he was paying 9.2 percent and his monthly
payments were $502. Suddenly, without explanation, the interest rate
was increased to 18 percent and his monthly payment went up to $895. He
told a New York Times
reporter that "It was like I was blindsided." He was. He does not know
what prompted the increase but told this writer it might have been
because he had too much credit outstanding even though he was within
the card's limits. It is obvious that the credit card company was
trying to show him the benefit of having less debt.

Another
instructional tool used by the credit card companies is known as
"Universal default. Thanks to modern technology it is easy for a credit
card company to learn if a customer has failed to pay, for example, a
phone bill on time. When that happens many credit card companies will
automatically increase the interest rates on the credit card held by
the late payer in order to reinforce whatever lesson the phone company
may already have taught the late payer by virtue of late payment fees.
These are just two examples of how the companies try to teach financial
responsibility. There are countless others.

Back in 2004,
when asked about the credit card companies' practices that remain
current, former FBI director, Louis Free, who was then general counsel
for MNBA, a credit card issuer, explained
how the credit card companies were helping out the borrowers. "If we
see indications that a customer is taking on too much debt, has missed
or is late on payments to other creditors, or is otherwise mishandling
their personal finances, it is not unreasonable to determine that this
behavior is an increased risk. In the interest of all of our customers,
we must protect the portfolio by adjusting a customer's rate to
compensate for that increased risk." The parent of a misbehaving child
could not have said it better.

Credit card companies do not
limit themselves to tutoring consumers in the art of financial
responsibility. They try to insure that no one who wants a credit card
is unable to get one. In the first quarter of 2008 more than 1.1 million
solicitations were sent out by the credit card companies. Some
companies such as Washington Mutual, (a company that would soon find
itself in worse shape than the worst of its credit card holders) cut
back on the number of solicitations it sent out but continued to target
the less fortunate in order to make sure that no one who wanted
something would be unable to buy it.

Not only do the
companies try to help the less fortunate-they actually target those who
have taken bankruptcy. Instead of shunning those who have resorted to
bankruptcy in order to get a fresh start, the companies target
those people. Explaining this compassion in 2005 when the bankruptcy
laws were changed, Laura Fisher, then a spokesperson for the American
Bankers Association said: "The people coming out of bankruptcy need an
opportunity to get back on their feet. If you take away the opportunity
to get credit it's like taking away the want ads from a job seeker."
Not everyone would equate being deprived of the ability to look for
work with being deprived of the ability to buy things. It's that kind
of creative thinking, however, that has made credit card companies what
they are today.