Monday, May 18, 2009

Credit card reforms could help consumers

On Mondays, we post a question and answer from a reader in this space. If you have a question you'd like to see answer, please post in the comments section.

QUESTION: There’s been a lot of talk about reforming the credit card industry. What do you think of this? Are the reforms meaningful? Is reform needed?

ANSWER: I attended a recent speech by Susan Keating who is the President and CEO of the National Foundation for Credit Counseling, likely the only national nonprofit group focused on helping consumers overcome debt problems. They have a lot of insight into various credit card issues, and have a seat at the national table addressing such things.
I see two prongs to this issue. The first is a kind of predatory activity on the part of some lending institutions. It looks a bit like loan sharking when interest rates exceed 30 percent and they truly prefer when people don't pay off their cards. If you can keep someone paying astronomical interest on a static debt, that's awfully easy money. Over time, the collective interest offsets the default rate, so those institutions keep making money without regard to their customer's misery or instability. That's evil.
The other - every bit as important - is people making really bad spending choices. A dumb choice is even dumber when it takes two years at 30 percent interest to pay for it. Especially electronic gear or other stuff that has little value on the secondary market. Check Craig's List or garage sales for a used television or game console. You paid $300 for it new, with another $50 in interest and fees, and it's worth $50 or $75 used. That's just dumb, dumb, dumb. (In fact, it might be okay with cash, but certainly not on credit.)
The worst thing is that people who make bad spending choices tend to make multiple bad spending choices. So it tends to be a combined $5,000 for new stuff, with $1,000 in interest and fees, and it's worth $250 or $500 used. It's the bad gift that keeps on giving.
It's not all bad, though. Credit cards sometimes allow us to capture good value. If your washing machine is on it's last legs and Nebraska Furniture Mart has a sale where you can save $200, then buying it now and paying for it over the next few months could be a terrific use of credit. The card saves you money and adds convenience to your life. That's the highest and best use of credit.
So, credit card reform might be a good thing if it wrings some excesses out of the marketplace. And I think it will. But the best results will happen when people start thinking before they buy, and I'm still a bit skeptical about this. But we can always hope!

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