Cat And Mouse

At it’s core, the credit industry seems to be a cat and mouse game between banks and customers, creditors and debtors.    Here are two stories that illustrate both sides.

Banks Evade Reform

The credit card bill of rights (CARD Act) is a great piece of legislation.   It closes many loopholes and bans many unfair and deceptive practices.   It is also no surprise that the banks would alter their practices to get around these new regulations.

Businessweek has an article going into some detail about how the banks are starting this process of evading the regulations.     One of the regulations that has already taken effect concerns the changing of interest rates that were marketed to cardholders as “fixed”.    The bank’s response is simply to change your card from “fixed” to “variable”, and then jack up the rates.     At least calling the card “variable” is honest, whereas varying the rate of a “fixed” rate card is not.     The big problem is that “Companies have already rethought rates. Under the new law, issuers can’t raise them without 45 days’ notice. But there’s a loophole: The rules don’t apply to variable-rate cards, with rates that float up and down.”      So the 45 day rule goes out the window.    While you can still pay off  and cancel your card before the change goes into effect, most people who are paying interest, almost by definition, are unable pay off their card.

Another fee they cite is a bank that is starting a $19 inactivity fee for people who haven’t used their card in a year.   I really doubt they will collect much from this fee.   If you haven’t used your card in a year, you will likely cancel it and not have to pay the fee.       While this new fee is really not going anywhere, don’t be surprised to see other creative fees being proposed.      These companies are in business to make money, and they will do it any way they can.   They may adhere to the word of the new rules but not to their spirit.

Even though I predicted this outcome, I still supported the legislation.     This morning, I heard a local radio commentator lament that this is just another piece of legislation that was gutted by the industry.   I disagree.    I still feel  that this legislation has teeth and is fair, I just think that there will always be more than one way to skin a cat, and it is very unfortunate if you happen to be the cat.    Just because banks can think up new fees, it doesn’t mean that attempts to reign them in were necessarily too weak.

Consumers Wiggle Out Of Debt

The Washington Post has an article on how consumers are increasingly able to convince their credit card issuers to negotiate on interest rates and even  write off some of their debts.    One card holder got his interest rate lowered, but only in return for closing his account.    Another got a zero percent rate for 12 months, but he too had to agree to close his accounts.     The article warns that closed accounts may hurt your credit score and forgiven debt has negative tax consequences.

In reality, closed accounts really only have a temporary minor impact on your credit score, and the I am sure the tax liability of a forgiven debt is a fraction of the debt itself.    The overwhelming concern for consumers should be paying their bills on time and maintaining their credit score.

The article just shows how consumers are also using every means at their disposal to conserve their money.    One could even make the argument that their behavior is more egregious.    As consumers, they purchased items, and agreed to pay interest on them.    Now they are asking their creditors to modify this agreement or risk default.   Is that better or worse than complying with the letter of the law, but not the spirit.

In the end, this is not a moral or ethical dilemma, it is simply about business.  Each party will maximize their profits while minimizing their losses.   So long as it is done honestly, that is pretty much how it should be.