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Thursday, April 23, 2009

Credit Card Companies Need Checked

Today Obama meets with execs of many major credit card companies to discuss his administration's ideas for new regulations to control some of the anti-consumer behavior of the companies (some of which I have personally experienced and I have written about in the past).

Here is just some back and forth I saw while browsing the web today:

XXXX wrote:
So I guess it's OK for credit card companies to raise your interest rate on purchases already made? How would you like it if you had a contract with someone to do some work on your house and they decided to charge you more simply because they wanted more money out of you? How is that fair play?

YYYY replied:
Yes. If it wasn't in the contract that they could raise the rate, then they can't legally do that, if it was, I must have agreed to it. So yeah, that's fair.


XXXX makes one of many valid points against predatory lending practices conducted by credit card companies. YYYY uses a typical (private party economics) argument as a response. IE., as long as presumably rational parties agree to a contract (in this case the company and the credit user), then there's nothing to see here... move on. Well folks, I hear that argument a lot (esp. from people with econ backgrounds), and I'm here to say it is shit. It's the typical "I don't really feel like thinking more than at a cursory level" response. Contracts are fine tools - and, in fact, contracts (that work in all senses of the word) underly almost all of economics as one of the largest assumptions the field makes. The problem is, like many assumptions in economics, it's not the complete reality. Contracts (implicit or explicit) are not made in a vacuum where all parties equally know what they are agreeing to, where no one has more power over the other, etc....

The truth is credit card companies have huge advantages over the consumer because they have 100% control over the language of the contract. Try it out - next time you sign up for a credit card, call them up and ask if you can have any of the myriad terms they wrote in their favor changed or removed - they will likely reply "no, that is industry standard." "Industry standard" is another way of saying the industry controls all terms and you get no say. Credit cards are necessity goods in our society - having little or no credit will come back to bite you. Credit card companies know this so they use that to extract power from consumers.

And that is even assuming you know what the terms are to begin with. Have you read the terms of your credit card? I have - I work with lawyers and legal statutes all day so I have a pretty decent grasp of these things - but I doubt the typical consumer is even halfway fluent in legalese.

Oh, and as I type this, hundreds of credit users are receiving small but pivotal changes in their terms (perhaps their interest rate is being quadrupled), but they probably won't ever see it, because it was thrown in the trash just like the other 8 mailings from the same credit card company they received during the week promising 'incredibly' low rates (restrictions apply, see fine print for details after eye surgery).

Having said what I've had to say, I don't ever want to hear that tired, ridiculous, idiotic argument in favor or "free" market (ie. continually abusing) credit card companies.

8 comments:

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