Credit Where Credit’s Due
This month, Thomas Geoghegan has an article in Harpers about how debt changed working-class America. Barack Obama sat down with bailed-out banks to discuss their credit card practices. I paid a bunch of ridiculous fees, actually usury, because I accidentally used my credit card instead of my ATM card at a cash station. Citibank announced a new Facebook program; for every friend you convince to get deeper into debt, Citi will give $50 to charity. And, a friend showed me a letter he had received from his bank. It was an offer to refinance his house at 105% of value, with no credit check or income verification required. Credit crisis? What credit crisis?
In my case, I called Chase as soon as I received the bill and asked that the cash advance feature be removed from my account. The first person I talked to told me that he couldn’t change it until I paid off my $140 cash-advance balance and all associated interest and fees (there is no grace period on cash advances). The second person I talked to said that the cash advance feature could not be removed unless I closed the account. The third person told me that the cash advance feature could not be removed, but the ATM PIN could be disabled so that I would not make the same mistake again. Now, if no one at Chase understands the fine print on the account enough to give me a straight answer, how am I supposed to understand it?
Interest rates are supposed to reflect the costs of borrowing money: inflation rates, the opportunity cost, and the default risk. But anymore, they are simply what the bank can get away with. Chase holds the mortgage and home equity line on our house, which are significantly more than the $140 cash advance I took by mistake. For that matter, my credit card limit is $20,000. I could use the card to fly first class to Paris and go on a spree at Le Bon Marche yet pay no interest if I paid it off in full the first month it was due. But take $140 from an ATM and hold the balance for 20 days or so, and the total fees and interest work out to about $24, an annual interest rate of 208%.
In an efficient market, a 208% interest rate implies that it is certain that I will default on the loan. If that were the case, shouldn’t Chase be more worried about the other charges on my credit card, or about the mortgage and home equity line? That rate could be a sign that inflation is expected to make prices to double in the next year. If so, Chase should be paying a little more on one-year CDs than 1.75%. Or, the charge could indicate that the loan has high transaction costs, which is doubtful given that I used a Chase credit card in a Chase cash station.
The real reason, of course, is that Chase charged me because they can. In his Harper’s essay, Geoghegan says that high interest rates on credit cards have damaged the working classes. He regrets that organized labor spent so much time fighting NAFTA and not the repeal of usury laws.
Barack Obama’s credit-card sit-down seemed to emphasize the need for better understanding of the rules, if not changes in them. For example, if the staff at Chase cannot understand my credit card terms enough to know if or how the cash advance capability can be canceled, maybe the product is too complex. (And if the staff at Chase was just making stuff up to get me off the phone, well then, that’s a different issue. And it’s not good.)
Just as its love of money, not money itself, which is the root of all evil, debt itself isn’t bad, although it can be a tool of Satan. My goal is to get the mortgage paid off, because having no debt would give my family a lot of flexibility. However, I am grateful for the student loans that made going to the college of my choice possible. The mortgage makes it possible for us to have a house we love. And yes, I have to admit, credit cards let me travel and buy furniture when I didn’t make enough money to pay cash. Businesses often borrow money to meet payroll while waiting for customers to pay, and they borrow money to expand and create new jobs. The U.S. government borrows money to finance wars, finance Social Security, and pay for air traffic controllers.
If we all had to wait to save up enough money to pay cash for everything, our lives would be smaller and commerce would crawl along like the Eisenhower Expressway at 5:00 pm. However, markets need information if they are to function efficiently, and the good folks at the credit card companies should be clearer about what they charge and what that means for borrowers. I’m not picking on Chase, because they behave just like all of their competitors do. It’s time for consumers to demand better, and that may mean giving up on credit for a while.