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Are Credit Card Companies Ethical? Is Any Business Ethical?


I have to commend Len Penzo for finally speaking out for the crowd that is “not against credit cards” or do not think they “are evil” with his very time post stating that he will not be cutting up his credit card. Prior to that, Adam Baker has written a post on how unethical credit card companies are. Even my good friend Matt Jabs is asking folks not to get cards just for rewards because the merchant fees actually make all goods more expensive to the tune of maybe say 2%.

My Stance – Firstly, if you do not know already, check out the credit cards that me and my staff use (for full disclosure). For me, I belong to the “camp rewards”. I pay my bills in full every month and I also do pay an annual fee for my card.

I do realize that there are folks who hate credit cards, had bad experiences with them (by getting into debt) and swear never to use them again. Folks like Brad Chaffee who has just got rid of his credit card. I respect that decision. I myself have weakness for certain stuff. While I have never carried any credit card debt, can’t be bothered to gamble (too troublesome), I can’t say “No” to candies I love. I tend to the most expensive electronics! So for those who can get carried away with credit cards, don’t use them.

But the “anti credit card folks” don’t accept this argument” – If everyone was reasonable, this would be the end of the story and it is best summarized by JD Roth who says do what works for you.

But Adam has gone into the territory of saying credit card companies are “unethical”. To quote him: “For me, the credit card industry is on the same level with the gambling and tobacco industries. I don’t mind the rare celebratory cigar, nor do I object to mindfully spending some of the entertainment budget at a casino.

However, the blunt truth is all three of these industries derive a large percentage of their profits from a select group of people who are caught up in destructive, cyclical habits. They feed off their respective junkies.”

By the way, he left out alcohol (does he drink the occasional drink?)

The huge problem with this argument is that applies to almost every industry. Here are some examples.

List of Businesses With Questionable Ethics

Is the jewelery shop that sells diamonds unethical because diamonds add absolutely no value to the economy other than vanity? How about other high end brands that simply exploit our vanity?

How about restaurants that serve ridiculous portions and contribute to our nation’s health problems (most heart attacks in the world?). MacDonalds’ for selling cheap processed meat and process chicken fingers? Or the diner that slaps loads of fat laden bacon! Preying on the lack of discipline among those who are overweight? Hey, we don’t need to go to restaurants right, just cook at home! Could even follow some pf bloggers recipe!

Gym owners – because they know that a large portion of their paying members do not use the gym anyway? So are they unethical because they know folks sign up in January and forget about their new year’s resolution by February and still pay their membership fees. A business based on people’s needs but also on a lack of follow through?

Workout programs and DVDs! Everyone knows that only a small percentage of folks that workout DVDs actually follow them, diet and achieve real results. Are these business unethical because the majority of their customers probably bought their videos on impulse?

How about food manufacturers like Kraft. Maybe they should not make mayonaisse? Too fattening? Contributes to the nation’s health problems!

How about every tourist shop that over charges their goods because they can get away with it? And they cause folks to overshoot their vacation budget? Or the ice-cream vendor that charges you $2 for an ice-cream at the zoo?

Perhaps we can lump online stock brokers into this ‘unethical” category as well since “academic studies” have shown that the probability of individuals beating a “benchmark return” is really small!!

Let’s talk about credit cards for a while

For those who hate credit card companies, including my friend Matt, the various reasons cited are credit card companies intentionally charge late fees, raise interest rates for no good reason. I have a few thoughts about this.

When credit card companies (ie Amex, Visa and Diners Club) first started in the 50s and 60s, all they issued was charge cards. The criteria to get those cards were strict. The on top of that, you have to pay an annual fee and pay in full but in return, you get the convenience of not having to carry cash all the time and earning rewards. In return, these companies got a nice cut from the retailers and merchants (and nothing wrong with that since we all have to make a living). In return, the more popular these cards got, the more retailers and merchants would benefit. Think of the time centuries ago when you actually have to carry silver coins! Carry a lot and the risk of robbery is great is the good old days.

As these pioneer companies got bigger, they realized that they could spread their product use faster if they allowed banks to issue their own cards but did the back end processing for them. Soon banks began issuing credit cards rather than charge cards and allowed cardholders to carry a balance.

Then, we reached a point where every bank was issuing their own credit cards. We reached a point in what economist would call perfect competition. And we know how things went from there.

Are businesses deliberately trying to make money unethically? – The curse of growing too big

I don’t know. Credit Card companies did not start out trying to make a living off charging late fees. In fact, in the corporate world, if a company issues debt and defaults on just one, it technically means that they have defaulted on all their debt and creditors can then pursue them. The term for this is cross-default. It is a standard term in any debt offering (which by the way makes the terms and conditions issued by credit cards a piece of cake). When a company is a day late in their bond interest payments, investors like PIMCO or Blackrock or even boutique hedge funds are not going to say: “It’s OK”, we’ll give you another day or two. They are going to take action and if it was due to some banking error, corporations have to pay some fee to creditors to prevent them from calling a default. It’s a tough world when you take on debt!

Also, as a corporation gets bigger, IT becomes a big challenge. Yes, it is scummy that they consider your payment late even if the check is dated before the payment deadline. But look at what happens to TD bank! Customers finding out their balance is zero, or that they have gotten an extra $200 in their bank accounts. When credit card companies merge, IT systems can really screw up customer service (see what happened to WAMU credit card holders when Chase took over them).

I’m going to state my view: I do not think credit card companies want to be making money mainly from charges and late fees. To think that would be insulting to folks in their senior management. OK, you could fault them for everything that happened in 2008 and their loose lending practice. But remember that many of them (or most of them) have MBA from ivy leagues. They can make mistakes but they are certainly not stupid. If you were the CEO of a bank, would you want to be making the majority of your credit card income from late fees! Come on, that is simply not sustainable.

If you start a gym, you probably did it with good intentions. You wanted the best gym environment and a core of loyal clients who value the workout environment. But what if you find that as your gym grows that only 25% of the people come to workout. The rest simply pay up, come for a month and then disappear (no follow through). Does that make you unethical as a gym owner? Would you give refunds to those who do not come but keep paying?

Or what if you sold a fitness DVD workout? Truth is that probably only 10% of the folks who your workout will actually do it and get great result. Does that make the producer and seller of DVD workouts unethical because the majority of folks who bought them do not workout.

Is anything that could cause an addiction or preys one’s vulnerability be unethical?

Sports teams charge a lot for their ticket prices. Once you are in the stadium, you are subjected to ridiculous prices for food and drinks and not to mention their merchandise! Are sports teams preying on our love for the team to jam us with “high priced” products unethical? After all, a shirt’s a shirt and to pay $275 for a jersey with a name written at the back?

MacDonald’s target their ads at kids. They make marketing arrangements with movies to give their merchandise with every kids meal! They make your kids want to go to McDonald’s and eat their unhealthy processed meat! Is that unethical?

Places like Costco deliberate design their stores so you have to walk the whole place! The result, very few people leave without ing more than they planned when they entered the store. Is that unethical?

Nutrisystems’s diet system consists of nothing more than smaller portions of junk food like frozen pizza in smaller sizes, smaller bag of potato chips. Is that really ethical? Isn’t that a little deceptive? Well, I guess you could still lose weight eating “less junk food but still eating junk food!”

Many kids get addicted to video games and flunk high school. Does that make the whole video gaming industry unethical?

The curse of growing big as a public company

I think a lot of the unhappiness directed towards credit cards and perhaps some of the areas I mentioned can be traced to the fact that these companies grew too big. When a company grows too big, things that did not seem important all of a sudden becomes very important indeed.

MacDonald’s did not get movie toys as gifts for kids meal until recently. But when you have saturated the US market and are looking for “incremental growth”, I guess you think of every crook and nanny to increase your bottom line. To increase revenue, Norton and all other security suites charge $59 for 3 computers! I don’t have 3 computers and only have 1, but I can’t a license for one at one third of the price! Is that ethical?

Disclosure and Terms and Conditions

Many folks also claim credit card terms and conditions are too difficult to read. Really?

Actually, contrary to many folks, I think reading a credit card’s terms and condition is one of the easiest things. But speaking about this matter. Let’s look at some other products with more complicated terms and conditions.

Mutual Funds and ETFs – Have any of you actually read the terms and conditions of any ETF or mutual fund you bought?

Terms of Agreement on software – Has any of you ever read the terms of agreement on a software you downloaded? Do you understand all the cookie jargon.

Cabla, Phone and Internet fees – Yes, only $49 a month for 1 year. But has anyone realized that cable and phone companies do not even disclose the “fee after the introductory period”! At least credit card companies do!

Perceptions and Opinions can be skewed by one’s experience

When you brand an industry to be unethical, very often, that view is shaped by one’s experiences. Adam’s view is shaped (at least partially) by his experiences with racking up debt. So is Matt. Matt has been cooled headed enough to keep a credit card and take responsibility for getting himself in to debt. Kudos to that. But to put a blanket “this industry is unethical” may be to blind ourselves to the fact that “the particular industry” may help someone people. I used to bitch about the high fees of sub prime cards. But then I hired a blogger (who is no longer working for me) who had been through bankruptcy and she was pleased she got get a high fee sub prime card to rebuild her credit! She did not mind paying those fees!

But people who have been scammed by say the internet with things like Acai Berry reverse billing fraud or “make money at home with google” and numerous other get rich quick scheme may be very wary and distrustful of ing any thing from the internet. And that would be a shame because there are great sites like Matts around that benefit so many folks.

For all the years that I have used the Blue Cash card, I’ve made over 2% in cash rebates and over $1000 cash back every year! Is that not frugal. But I guess folks who hate this industry will never see this benefit because they close their mind to the fact that credit cards can be useful.

Being Ethical Has Its Cost

Being ethical can have it’s cost? Why? Because the majority of people do not think about it or bother about it. In a competitive world where price and costs matter, firms will do anything to cut cost. Diners will get lower quality meat cuts to reduce cost. The “ethical restaurant owner” who wants to serve healthy food and use only olive oil will have a tougher time because of higher cost. And folks still want their greasy bacon and egg sandwich even though their heart is crying out load for them to stop! Consider how much more expensive are organic food than regular food. Goes in a cycle, the more expensive the item, the less people . They less people , it will not be economically feasible to reduce prices. You could a cheap computer from Best Buy. But to make it cheap, hardware makers sign marketing agreements with software companies and load up your computer with software you do not need! And to keep prices lower, they outsource tech support to India! (nothing against Indians but I’m sure Indians would not want tech support from Southern Texas cos they wouldn’t be able to understand us either!). Or you could from a great firm like Puget Systems, who custom makes your computer, install only necessary programs, does not upsell you, and has tech support in the US! But it cost more!

If every personal finance bloggers recommend getting a charge card, which has an annual fee and also requires full payment every month, everyone of us may be better off! Credit card companies earn their annual fee and there is much less default risk for them! There is no preset spending limit, so you would not have your limits cut! But hey, who am I kidding. Every pf blogger will say “get a no annual fee credit card instead”! But look at it this way, the more free stuff we demand and expect, the more creative ways corporations have to sell to us to make money. So you could sign up with mint.com for free and get ads and “questionable recommendations” for credit cards and other loans! That is what you get with a “free” and “cheap” mentality, corporations needing to “upsell” you with “backend poducts” to remain profitable! And this is where the temptation to cross the line comes into play.

There will always be demand for “unethical stuff”

For every person like me who is willing to pay an annual fee for my Amex charge card, there are probably 20 people who would never want to pay a fee for a credit card. For every person willing to spend more on organic food and healthy food, there will be more who just want their cheap greasy bacon and cheese bagel for breakfast or their Big Macs! For every person that values customer service and wants to a great computer, there will be dozens others who will settle for the “cheapest computer” that outsources tech support to folks who have trouble understanding us! For every Matt Jabs that realizes what a time waster cable TV is, the are dozens who would get the latest HD Plasma TV and veg out in front of the tube! For every serious person like Adam who is looking to build his blog and internet projects, there are dozens of people who are addicted to and just want to play their latest wii game (does that make wii an unethical company – after all, all they do is make young kids addicted to games?).

At the end of the day, most people know that they are doing or consuming stuff that they should not. Most of us know we should eat healthy food but don’t. We know we should pay our credit card bills in full, but many don’t.

But can we make a blanket statement and say credit card companies are unethical and say they belong to the tobacco and gambling group? Should we include all diners that serve greasy food and indirectly cause American to have the highest rate of heart attacks? Should we include video game manufacturers, though whose main aim is entertainment, ends up causing addiction to games and as a side effect destroys marriage and lose productivity at work?

Where do we draw the line of ethics and personal responsibility

The problem with labeling the credit card industry unethical is that you might as well label the capitalist system as unethical! Businesses are in the business of “selling their stuff”. We as consumers are responsible for doing our own research and figuring out if a product is right for us and how to use them!

Ending thoughts

But I guess the real problem I have when some one writes a post like that is this : it appears that the sole purpose of most post like these is just to get attention (or it could be unintentional and still get all the attention)! Write a anti credit card post and rest assured that frugal dad will stop by and pat you on the back. But if you really give it some thought, this line of reasoning would lead you to live like the Amish!.

So to all bloggers out there: If you want to write another posts about how evil credit card companies are (and there is nothing wrong with that), then please also write about the restaurant industry, the gaming industry, the “online broker” industry and how “unethical they”. And heck, you should be against Lending Club as well since it encourages folks to borrow and give them another outlet now that banks are starting to tighten the screws! Write about how the Federal Reserve printing money is unethical.


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