Myths About Credit Cards
by Jason SteeleThe Washington Post has a thought provoking article by Robert D. Manning on the “Five Myths About America’s Credit Card Debt”. Let’s take a look:
1. Middle-class American families have long depended on bank credit cards to manage their budgets. Here Manning recounts the history of credit cards and shows us how Americans have only recently started relying on them to finance their lifestyles. I am reminded about how, like credit cards, commercial aviation was once seen as a tool for the elite, yet is now more popular than buses.
2. More people have credit cards because companies got better at managing risk and began marketing to lower-income customers. No, they just got better at charging higher interest rates and fees. Here is a great quote: “A carefully guarded secret of the industry is that about a quarter of cardholders have accounted for almost two-thirds of interest and penalty-fee revenues. Nearly half of all credit card accounts do not generate finance and fee revenues.” This is a subject that I have touched on before. Either you are “deadbeat” who pays no interest or fees, or you are a revolver, who finances the industry. Either way, the banks make a profit as deadbeats are low risk, but rack up merchant fees through transactions. On the other hand, while revolvers are high risk, their interest and fees paid make them also high reward customers.
3. Responsible cardholders will have to pay more to make up for the defaults of irresponsible consumers. No, the deadbeats do not subsidize the revolvers. If they did, banks wouldn’t be so eager to offer credit cards to the deadbeats. Manning deserves credit for getting this right, as so many other pundits have gotten this wrong lately.
4. The credit card industry is so competitive that regulation is unnecessary. Bing, this is another falsehood that the industry would like you to believe. Yes, it is competitive, but they are competing on rates and rewards. When it comes to unfair practices, they have been getting away with murder for decades, until the CARD act. Money quote: “Consumer choice has declined over the past 20 years as economies of scale for marketing, administration and customer service have led thousands of card issuers to cash out to the largest banks. And self-regulation has failed when it comes to weeding out the worst card issuers; Visa and MasterCard have dismal track records in disciplining their members.”
5. The CARD Act finally protects consumers against the credit card industry’s most abusive practices. Here, Manning plays the role of pro-consumer CARD act pessimist. He seems to like it, but is upset that the industry was given nine months to implement it. Yes, nine months was a long head start to come up with new tricks and traps, yet now that we are just three weeks away from the CARD act becoming effective, I am one to let bygones be bygones and celebrate the achievement that the CARD act represents.
Conclusions
All and all, Manning shows that he understands the business and can see through industry propaganda and the the claims of less knowledgeable “experts”. I am glad he is there to set the record straight.