John Cole posts about what he sees as a big problem: credit card companies gouging their customers. As I mentioned in the comment section, I have some experience in this field. I previously worked for a bank that no longer exists and I currently work a major credit card company. As I did when I worked at the bank, I approach all of the assessed fees from the standpoint of a consumer first. The company takes a back seat to my own self-interest.

Case in point: the bank marketed PC banking, Internet banking and ATM banking to their customers as a method to keep the bank's costs down. Trust me when I tell you that an electronic transaction is at least an order of magnitude cheaper than dealing with an actual teller. These services were usually free the first 3 months, and then the price would rise to $4.99/month. Since you'd be saving a fair amount of money on postage, this seemed like a fair trade. About a year after hooking people on PC banking crack, the financial institution jacked up the monthly cost and added some transactional fees on top of it. The excuse given was that the infrastructure costs of operating the personless banking cost a lot to maintain. So the bank saved money by reducing the human interaction, but the customer got reamed for more cash anyway. Fair? Not hardly. The only reason I used the service was that, as an employee, all costs and fees were waived. Once I left the company, I dropped the services. Screw that.

Anyway, onto the credit card discussion. As I mentioned, I left some lengthy comments over at Balloon Juice. Since I don't feel like recreating the wheel, I'll repring the comment here:

I actually work in the financial services industry, and one CC company in particular. This offers me some particular insight as to how and why interest rates can change so drastically. These changes vary quite a bit from company to company, so YMMV. Anyway.

You think that a rate of 24.9% is akin to loan sharking? Since credit cards give the consumer unsecured debt(I'm ignoring securd CC's right now), the issuing company uses its bean counters to determine what interest rate is likely to give a positive return overall for a particular population. The monetary returns from interest rates and monthly/yearly fees are used to offset the number of cards that go into default(charged off).

Let's examine the 24.9% population. Assuming that this is the first card for someone, then the person receiving it tends to fall into one of two major categories:

1) No credit history, i.e. recent high school or college graduates. CC companies are taking a leap of faith, based on the usage and payment history from previous card holders in this group. Usually, the credit limits issued with these cards are low, from $500-$2000. Once reasonable payment history has been established, most companies reduce the APR while simultaneously increasing the credit limit. This helps increase customer satisfaction.

2) People with crappy credit histories. Delinquencies, past bankruptcies, collections, past charge offs. These are all indicators of risky customers. High interest rates and fees are used to balance the increased liklihood of customer charge offs.

Now, let's address the reasons why a company might increase your interest rate. Usually, these are invariably rule breaks by the customer: late payments, delinquencies, etcetera. However, some companies( Citibank, most notably) will monitor not only your payment history with them, but rather your credit behavior overall. If you've been late to OTHER creditors, this can be a strong indicator that a customer is becoming more risky overall, and therfore more likely to charge off. Be advised that this was all spelled out to you in the initial disclosure of terms sent with your credit card. Most people do not read the fine print of 10+ pages. That's an unfortunate reality. However, they have agreed to accept adverse actions taken against their account by accepting, signing and using the cards, insofar as it is disclosed in the terms. I know people that work in our legal and compliance department; they take those disclosure seriously.

Companies are required to justify any repricing actions that they take against your account. If you call in and ask why your APR skyrocketd from 9.9% to 24.9%, the phone rep should be able to tell you. As I mentioned, it may have nothing to do with your payment history with that particular financial institution, but may be based on your credit performance as a whole. You might not like it, but if you check your initial disclosure agreement, you will probably see the company giving itself that particular out.

I can already guess that some people will discount my views as those of a money grubbing capitalist simply because I work for a CC company. However, as an employee I have a pretty good handle on how and why adverse actions are assessed. Back when I worked for a bank, there were many fees that I disagreed with from a consumer standpoint. Sometimes from a moral standpoint, too, but that's another issue entirely. However, in this case, I tend to side with the companies offering the unsecured loans. Just my opinion, of course, but it is an informed one.
...
[later comment]
And who determines what is or is not the appropriate practice? The government? Since our DC types don't seem to have any ability to manage their own finances, I'm strongly opposed to them regulating those of credit card companies. After all, the company is the one taking all of the risk by offering a credit line without any collateral. And no one's forcing you to take the credit card. If you don't the terms for a particular company, don't take their card. Whining about the negative results to you when a company attempts to mitigate its own financial risk sounds like sour grapes. You may not think you're a credit risk, but the issuer of your card has only credit bureau data to rely upon. If negative information exists there, blaming the card company for raising your rates seems pretty poor form. Just my opinion, though. I could be wrong.

John Cole remained unconvinced. However, I think John Henke sided with me in this discussion:

It's an (initially) appealing position to take, John, but it's economically illiterate. And desctructive. What you call inappropriate is what other people call freedom to set their own prices.

And you are, after all, free to go to another company. Would you advocate price controls in other industries? Maybe blogads are getting out of hand -- ha! -- and we need to restrict the prices charged? Maybe it's time for another bout of wage and gas price controls?

Risk is just another commodity to be traded, and as long as there's a free market, it will coordinate nicely. [snip]
...
I'm sure you will find plenty of credit card companies willing to lend for 2+ times the prime rate.
But what about the portion of the credit-needing population which cannot be profitably extended credit for less than 3-7 times the prime rate? Where do you suppose they'll turn?

And why do you think that--this time--price controls will work out so well? Because they've always worked out so well in the past?

Some might claim that it's impossible to function in today's society without owning a credit card. After all, many people/places require a number before they will accept reservations, such as rental car companies and hotels. With the prevalence of debit cards, though, I find this a bit of a straw man. Your debit card has the familiar Visa logo clearly emblazoned on the front, and the amount that you can "charge" is limited to the cash in your account. Think of it as a secured card in which you actively control the limit.

Back to the bank.

A friend of mine work in the IT section of the ATM department. The bank ATM's had a nice function: you could pull account activity for the previous 3 months, sort of a mini multi-month statement. No teller activity, no physical action required by the bank. Just a few pieces of paper printed out. One day the bank decided that these statements could be a cash cow and started charging $1.00 per mini-statement. After the initial dustup of customer complaints, the usage of mini-statements dropped to about zero. Any thinking person would have figured that out in advance. However, not all business decisions are made by thinking persons. Getting to the point, that's another fee that I found ridiculous. However, it became a self-defeating stream of revenue. In other words, a stupid frigging fee.

Back to credit card companies.

Just to reiterate, credit cards offer unsercured credit. You don't have to offer any collateral other than your name and credit history. If your credit history isn't pristine, the card company assumes a greater risk if they issue a card to you. If you don't like their offer, go somewhere else. If no one will give you a better offer then maybe, just maybe, you should examine your payment history overall. For the record, I pay for a full credit history once a year just to make certain that nothing incorrect shows up there. Then again, I tend to be anal in that regard.

In any event, while I have had the same ox gored that John Cole apparently has, I didn't quibble when my card company raised my rates. I had endured the pain of actually reading the agreement when I received the card. Assuming that the terms weren't acceptable, I could have simply destroyed the card. However, I DID accept the card and the responsibility that goes along with it. When I became delinquent(once) at another institution, I became, in the eyes of the card issuer, a riskier customer. You know what? They're right. People that end up defaulting on their debts or declaring bankruptcy typically engage in risky credit behavior prior to actually giving their creditors the shaft. Card companies have a feduciary responsbility to themselves to mitigate this risk as they see fit. You don't like it? That's okay. Asking the government to step in because you don't, though, is not, as far as I'm concerned.

Posted by: Physics Geek at 05:58 PM | No Comments | Add Comment
Post contains 1722 words, total size 10 kb.