When it comes to student debt, most people think of college tuition. But credit card debt can be almost as crippling (“Buy Now, Pay Later,” by Niko Amber, The Concord Review, Fall 2019). With little regulation, banks have been able to reap huge profits at the expense of young people barely out of high school.
To understand why, it’s necessary to rewind the tape to the early 1970s when credit card companies miscalculated the number of cardholders who would pay their balance promptly. These companies only make real money when cardholders roll over their debt from one month to the next. When cardholders pay on time, profits are severely reduced.
To enhance profits, credit card companies began to seek out young people because they correctly realized that this group typically do not pay their bills on time. These riskier consumers, therefore, incurred high interest rates as they rolled over their debt from one month to another. So-called kiddie credit cards began to be issued that did not require a parental co-signer. And the strategy has been enormously successful. More than half of the nation’s college students owned a credit card, even though they have no credit history. The Los Angeles Times reported that marketing credit cards to high school students was growing.
The only bright note is the Credit Card Accountability Responsibility and Disclosure Act that was passed in 2009. It gave some protection to consumers under the age of 21 by banning aggressive marketing to college students and required that credit card companies give consumers clear warnings about now much interest would be charged if they paid only their minimum monthly payment.
The problem is that young people today want instant gratification. As a result, I doubt that CARD will do much to change matters.
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If the govt were serious about protecting consumers from their own stupidity, the govt would impose a cap on credit card interest — say prime + 5%. Then, banks would have a much stronger incentive to issue credit cards and set debt limits based on the borrower’s ability to pay.
As you imply, the credit card issuers lose $ on the immediate-payers. The credit card issuers also lose $ on the late-payers who ultimately default and file for bankruptcy. The credit card issuers recoup these losses by making a lot of $ on the late-payers who ultimately pay the charges plus interest at a very high interest rate. The credit card issuers also make some $ by charging merchants a small percentage of each transaction price. Not sure whether these charges to the merchants covers the credit card issuers cost of processing the transactions and extending credit to the on-time payers — probably not.
This arrangement seems at least somewhat immoral and definitely bad economic policy. The arrangement, in effect, imposes higher than market credit costs on the plodders who are dumb enough to buy too much on credit but nevertheless are diligent enough to eventually pay off the interest-swollen debt. The arrangement, in effect, gives lower than market credit costs to the affluent/sensible people who pay on time and to the totally irresponsible people who buy far too much on credit and then default rather than pay off the interest-swollen debt. At a minimum, the cost of the defaulted bankruptcy debts is eventually spread over the entire economy in the form of higher credit costs and/or higher merchant fees (that, in turn, mean higher prices for all consumers).
This all boils down to a strong public policy argument for the govt to cap interest rates that credit card companies can charge so as to give the credit card companies a much stronger incentive to limit credit to those likely to be able to pay the debts.
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Labor Lawyer: Yes, indeed! Without a cap, more and more young people will have a bleak future. Yet I also think that high schools need to require a course in personal finance before graduation. Young people don’t understand what they are getting into. Moreover, they need to learn self-discipline when it comes to finances.
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