Credit card companies offering cards to people with bad credit: predatory lending?

Great Debates
1

I just read a book about bankruptcy.

Anyhow, I’m aware that predatory lending is normally something that bad companies do to try to trick people with bad credit (and little money) into taking out a home equity mortgage. The idea is after a while, the customer will default, lose their house and the company gets it.

Before I ask my question, this is how I see it:

Credit card companies want people to go into debt. They aren’t losing a dime, even on people who file for bankruptcy, because they’re charging everyone an arm and a leg in fees and interest. They freely give credit to everyone of age, even people who have filed for bankruptcy or have otherwise terrible credit.

So what I’m wanting to know is:

  1. Would it be a total violation of everything we hold dear in capitalist America to make a law that prohibits credit card companies from offering credit cards to, say, people whose credit rating is, oh, under 625 or something? (Note: secured credit cards would still be available to anyone willing to put up the money for it.)

  2. What would happen if suddenly they could only offer them to people with average (and above) credit?

I’m not saying we SHOULD do this, don’t get me wrong. I’m all about the free market, I’m no commie. I realize that nobody puts a gun to anyone’s head and makes them sign up for a credit card. Nobody makes you swipe it, either. Lots of people out there are just plain stupid and can’t control themselves when they get the plastic in their hands.

However, these companies know that certain customers are very likely to get themselves into trouble, and don’t even have the means to pay their bills to begin with. These are precisely the people they go after!

With bankruptcies through the roof, I can’t see how allowing everyone access to credit is a good thing for society in general, OR the individual.

In the past, to get any kind of credit you had to prove that you had the means to repay the money. Today it’s handed out to anyone old enough.

So what’s the answer?

Yes, personal responsibility is part of the solution, and we already know this, so let’s not go there for now.

Are the credit card companies completely innocent, though? If not, what can be done to stop them from encouraging people who are already broke to take on even more debt, WITHOUT trampling on their right to do business?

2

My first guess is that it would turn out that minority borrowers would be more highly represented in whatever “bad credit” category you tried to define. Guess what would happen then.

My second guess is that other lenders (eg, home equity loans) would quickly fill the void.

3

It doesn’t take a genius to figure out that spending more money than you make is a bad plan. I think there is a failing here, but it is a failing on the part of our entire society. Maybe our schools need a brief section on person economics (don’t fall for work at home scams, don’t get in debt, don’t lease your television from someone) or something. And credit responsibility should be part of every college orientation.

4

Isn’t it sort of self-limiting behavior on the part of the credit companies?

They offer credit to people who have a history of not paying their bills. After a while, those people don’t pay their bills. Then either [ul][li]the credit card companies make enough off fees and interest to make a reasonable profit, or the credit card companies don’t make enough off fees and interest to make a reasonable profit.[/ul]So their business decision to extend unsecured credit is either validated as correct, or not. [/li]
If it is not correct, they will tend to stop doing it. If it is, they will continue.

If the credit card holders wind up footing the bill thru penalties and interest, too bad for them. If the credit card companies wind up footing the bill thru defaults, too bad for them.

People are always saying “you can’t legislate morality”, and I am not sure I agree, but they also say “you can’t legislate stupidity”, and I tend to agree.

The most responsible way to use a credit card is to get one with no annual fee, and pay the balance off in full every month. If you can’t afford to pay off the balance, don’t spend the money in the first place. It costs more, in other words, to carry a balance. So if you can’t afford to pay off the balance, you can’t afford to pay the larger amount later either. But you can’t legislate that into place.

Extending credit to someone is a business decision, and the consequences of that decision devolve directly on the ones responsible for making the decisions. Legislating on who gets credit is a political decision, and the consequences are much less directly connected to the ones involved.

Paying off your credit card balance every month on a no-annual fee card is a short-term, interest-free loan. If that is “predatory lending”, I wish more people would prey on me.

Regards,
Shodan

5

As an example of what might qualify as “predatory lending”:

My girlfriend, in her professional capacity, came across the following practice by a major credit card company here in the UK. The CCC had two target markets (I forget the precise names). Group 1 were reasonably well-off responsible borrowers who follow Shodan’s advice above by paying off the balance and, moreover, regularly take advantage of 0% interest balance transfer offers from other credit card vendors. The strategy with these clients was to offer a permanently low rate (<7%) to encourage loyalty and maybe the occasional delayed pay-off for really big expenditures.

Group 2 membership was based on poor credit records and, as far as I could see, the CCC was essentially preying on their (self-percieved) desparate need for money. For example, the basic interest rate for these clients was 29%. However, the junk-mail offer they recieved made much a “fast-track” service whereby the payment of £10 would mean a super-quick process of the application. “Just £10 for instant access” screamed the junk mail. Buried in the terms and conditions was the following information: “For customers choosing the fast-track service, the APR will be 31%”. (I paraphrase both quotes, but the figures are accurate).

Now, the CCC’s assumption was that people who would likely sign up for the fast-track option would not read painstakingly through the small-print - an assumption I agree with. But the contrast between the clear offer a service at an apparent low cost, and the careful hiding of the true cost deep in the small-print, strikes me as being entirely predatory on people whose financial judgement has already been shown to be lacking. If legislation were passed mandating that all APRs (especially relating to special offers) were printed on the same page, and in the same font/typeface as the offer, would this be an unwarranted intrusion into the free market, or legitmate protection of consumers from unethical business practices?