My wife was going through the mail yesterday and noticed that the contract terms for two of our credit cards were changing.
On the first card there was a large credit-limit increase (unrequested), and on the second, the interest rate for carrying a balance was being adjusted upward to 18%. Neither of these changes were of much consequence: we don’t carry a balance, and, as I said, the credit-limit increase (timed for the holidays, no doubt) was not requested.
I am generally not in favor of increased regulation for private contractual arrangements. Paternalism from politicians is nearly always distasteful and/or ill-advised, and the accompanying over and under-inclusiveness problems make government regulation of private contractual arrangements difficult to do well. Additionally, one person’s license to make irresponsible decisions is another’s much-needed access to credit.
But the credit card industry needs more regulation. An 18% interest rate is unconscionable, and the variety of programs by which credit card companies ensnare unsophisticated borrowers disproportionately impacts the most vulnerable consumers. In her book, The Two-Income Trap, bankruptcy expert and Harvard law professor, Elizabeth Warren, recounts being hired as a consultant by Citibank to recommend ways to cut its losses from cardholders in financial trouble. She made a proposal essentially arguing that Citi should stop lending to borrowers who were already in obvious financial trouble. As she recounts it, the ranking executive present at the meeting replied “We appreciate your presentation. We really do. But we have no interest in cutting back on our lending to these people. They are the ones who provide most of our profits.” Warren is a bit of a polemicist, and she has been known to strain statistics to the breaking point.
Nevertheless, it seems to me that the credit card industry, as presently constructed, is morally bankrupt (not just morally in Citi’s case). It systematically tries to identify and exploit the most vulnerable and unsophisticated members of society by offering temporary financial relief in exchange for an unreasonably large long-term commitment. I plan to explore in a future post the type of regulatory safeguards that I think should be in place, but I am curious in the meantime about people’s thoughts. Are many of the credit card industry’s practices immoral? Does the industry need more regulation? If so, what should that regulation look like?