Over my career, I have seen thousands of consumers that have credit card lines in excess of their annual salaries. Some are sinking under their burden. Some have been fiscally responsible and have minimal amounts outstanding. My 21-year-old daughter, who’s in college, gets pre-approved offers all the time. She has no ability to repay debt, yet the offers flow in just the same. We all know how these lines are accumulated. The banks, in their infinite stupidity, keep upping credit lines because the customer pays the minimum payments on time. My daughter’s credit line started at $1,000 and has been increased over the last two years to $4,400. She has no increased earnings to support this. But the banks do it without asking. And without being asked. The banks reel in the consumer, charge interest rates higher than those charged by the mob, increase lines without the consumer asking and without their consent, and lure them into overextending. And we can count on the banks to act surprised when they aren’t paid back. Shame on them.
As a banker, let me describe what we do wrong when we accept and review an application for a credit card. First, we don’t verify income. The first ”˜C’ of credit: Capacity to repay, is completely ignored by the banks, just as it was in when they approved subprime mortgages. Then we ask for “household income” ”” as if other parties in the household could be held responsible for that debt. They cannot. And since we don’t ask for any proof of income, the customer can throw out any number they think will work for them. Then we ask if they rent or own and how much they pay. If their name is not on the mortgage, they can state zero. If they pay $1,000 in rent, they can say $500. (Years ago we asked for a copy of the lease to verify this number.) And finally, we don’t ask how much of a credit line the consumer is looking for. The banker can’t even put that amount into the system. There isn’t any place on the application for that information. We simply put unverified information into a mindless computer and the computer gets the person’s credit score and grants them the biggest line that score and income (ha!) qualifies for.
This behavior, on the part of banks and of their customers, is crazy. Why would anybody lend money to someone who may not have the capacity to repay? Why borrow what you have no hope of repaying?
As we have drummed into our children’s heads: Never charge something on a credit card which you can’t pay for at the end of the month. If you can’t pay, do without it until you can.
Or better yet, skip the credit cards all together. Credit is just another word for debt. If you can’t pay for it upfront then do without until you can. Credit cards and those that issue them are evil.
Oh, I use the credit card as a convenience. I can pay once a month, and I don’t have to run to the bank for cash or expose my debit card to risk by use with merchants. With the credit card, if someone gets hold of the number and misuses it, my liability is very limited. If someone gets my debit card information they can clean me out. The credit card is safer so long as the user has self-restraint. For those without, go to the bank and get cash.
My guess is that banks made the cold calculation that, all in all, they would net out more money by pushing credit as widely as possible and accepting defaults as a cost of doing business.
Thomas Friedman had a good Cliff Notes summary in yesterday’s NY Times (drawing on an excellent longer piece in Portfolio.com by Michael Lewis, the author 20 years ago of Liar’s Poker).
I just ran across an even more interesting piece by Michael Lewis in the September Portfolio.com. Writing about his own experience renting a mansion, and as if he were applying Toyota’s Five Whys root-cause analysis, he muses that ultimately it was middle-class pretension that got us into this mess:
(Emphasis and extra paragraphing added.)
#3 – (sidenote) – Katherine, if your debit card has a Visa or Mastercard logo on it, the liability issues are identical as with a credit card. With regards to disputes, the bank is almost always the loser and the consumer is almost always the winner. The credit card is no safer than a debit card.
#6, thanks. But my liability with my credit card issuer is zero, unless I fail to notify them promptly as soon as I become aware of misuse. I would far, far rather not have to argue with the bank to get back funds fraudulently withdrawn with my debit card. On the same note, I pay bills online using only my own bank’s online bill pay function. I do not give my bank account information to any creditors I deal with.
The banks aren’t stupid – they make money on these things. I could tell you horror story after horror story of credit-unworthy people getting offers of a credit card. They take the card and find themselves having to pay $250 without having charged anything, and with interests rates upwards of 30%. Most of these cards originate in bank-friendly states like Biden’s Delaware and Daschel’s South Dakota. The stupid banks were the ones who bought into the schemes of their bright young minds who thought you could squeeze a buck from a stone and were pretty good at it for a while. And now we bail them out so they can continue to live well at the expense of the ones they victimized in the first place. What a country.
My son has been getting credit card offers (“pre-approved”) since he was two!
#9: “My son has been getting credit card offers (“pre-approved”) since he was two!”
My daughters got them even sooner – Airline frequent flyer programs seem to be the trigger.
Hmmm. In the good old days before Constantine, converts from pagainism to Christianity often had to change jobs before they could even be enrolled as catechumens, much less baptized into the Church (as in The Apostolic Tradition, often attributed to Hippolytus of Rome and its core often dated to the early 200s AD). If you were a teacher of pagan literature, or a soldier etc., you had to find a new job, or you couldn’t join the Church.
Well, it seems to me that perhaps we should revive that practice, and start by saying that anyone who works in management for a credit card company must quit and find a new career, or be excommunicated. And I’m serious about that.
David Handy+
#11 – and that brings us to the doctrine of the Church regarding usury (Elves, correct me if I’m wrong, but I think this is directly related to the posted article). Should also those who choose to borrow money at 30% be excommunicated? Or just those who lend?
Charles (#12),
It was precisely the OT laws against usury I had in mind, such as Deut. 23:19-20. And although I was being a little hyperbolic above, I was only half joking. As for your question, I had only the usurious lenders in mind. The victims of such exploitation may be stupid for accepting such exploitative loans, but fortunately, stupidity is not an excommunicable offense.
As Proverbs 22:7 aptly warns us, “the borrower is SLAVE to the lender.” Dave Ramsay, the Christian finanical guru, loves to quote that one incessantly.
Maybe I feel so strongly about this because I fell into that trap myself years ago, and paid dearly for my folly. Or perhaps it’s because I’m a native of Sioux Falls, where several of the worst abusers in the credit card industry have their headquarters due to the extremely lax credit laws in South Dakota. It’s made a few people in my hometown very rich, but millions of people miserable.
That is, a local benefactor and bank founder gave the hospital where I was born a whopping $400 million a couple years ago. I was pleased and proud of how Sioux Falls was going to have a world class medical center like the Mayo Clinic, until it was pointed out how the banker made his fortune, i.e., through abusing people through the credit card business.
David Handy+