The Moral Question of Credit Cards
My (Adam's) thoughts on the credit card industry:
First there are alot of credit card companies that charge tons of fees and have ridiculous rates and poor description of terms.
I don't work for a company like that. I work for a company which is cutting literally Billions of dollars in profit by simply lowering fees and making cards more understandable. The real issue I have is whether or not it is good for certain people to be taking loans for certain purposes.
Take some guy Joe. Joe wants a flat screen TV. The TV costs $500. Joe can't afford one, so Joe takes out a loan in the form of credit card debt and only makes payments of $20 a month because that's all he can afford. The result is that it will cost him about $620 to buy that television. Joe should have just saved the money in the first place.
Secondly, if Joe takes out a loan because Joe fundamentally can't afford what he is getting, then taking out a loan is the last thing Joe should do. The only case in which he would want to take out a loan is if he is using the loan to make money. I.E. Joe's investment of the loan makes money relative to the cost of the loan. (Buying a house is a good example as house prices are likely to increase more than the cost of the loan. Plus the time it takes to save that amount of money would mean that Joe might be dead ore really old by the time he could buy the house.)
Third, if Joe really needs a loan for $500 and he is using it to buy a consumer item, he may never be able to pay back, and certainly not quickly. Alot of companies have gone bankrupt for this reason and others have made fortunes over skating the other side of that line. In any case it probably isn't good for the customer to be borrowing that amount for that long.
Finally, (and perhaps most importantly) if he can't afford the TV he shouldn't buy it!! I think this really gets at the heart of the issue. People are spending money on consumer goods instead of building equity in a house or trying to get ahead at work or something else to improve themselves. They are using loans as fun money, or to cover extravagant living expenses. Credit cards are basically enabling this lifestyle...for a while and at a cost that mostly falls on the consumer.
However, credit cards do meet several very real needs.
1) They can help provide a cushion if cash flow cuts out or is intermittent for an individual.
2) They help build credit. For me I love credit cards, because otherwise it would be very difficult to get a mortgage in 5 years when I need to.
3) They work great as a payment vehicle (online transactions and not carrying cash), as a bargaining tool for consumers (lowering prices and negotiating overcharging), as protection for consumers (credit card fraud is alot easier to deal with than check fraud which can send you to prison), and as a way to track spending.
Not only are there all of these good things, but there are tons of people for whom managing credit is not a problem. And the occasional loan is very good. For example I had a friend who was going to get a great job, but didn't have any money, so he used a credit card to foot the bill for a life changing trip to Europe in the summer after college. He has almost paid back that loan in full.
However, as previously described credit cards are dangerous to many people. They can lead to a large amount of debt that really isn't beneficial to the customer. True that $500 debt doesn't really kill alot of people, but it doesn't help it's just not good.
The weird part is that when you try to help these people they get angry. Raising the minimum monthly payment of a credit card to 10% of the total balance would be a huge help because people would actually have to budget, but they would probably never use your card. They will chose someone else's card that is worse for them even though they know (almost everyone knows credit card debt is a bad idea, even the really poor among whom someone who is using credit is the poorest; debit is more well respected) that because it looks more attractive.
It's basically greed and coveting. It's those same desires that lead men to sleep with their neighbor's wife. They know it is wrong, but it is just so attractive, and no one will know just you and the credit companies...
So is it okay to work for a business that makes alot of it's money off of people's greed and stupidity? I am not yet sure. But I know that most people wouldn't be against companies like Best Buy or Sharper Image where credit cards are being used constantly to buy things people don't need, but just want really, really bad.
I think for now I am okay with it. My company is working hard to make the industry better, and ultimately wants to change the face of all lending and banking. Maybe we can educate customers or work to make tougher regulations in place for minimum payments from the federal government. As long as I remember that my role is to make things better for my customers then I will seize every chance to make those changes that will help others.
First there are alot of credit card companies that charge tons of fees and have ridiculous rates and poor description of terms.
I don't work for a company like that. I work for a company which is cutting literally Billions of dollars in profit by simply lowering fees and making cards more understandable. The real issue I have is whether or not it is good for certain people to be taking loans for certain purposes.
Take some guy Joe. Joe wants a flat screen TV. The TV costs $500. Joe can't afford one, so Joe takes out a loan in the form of credit card debt and only makes payments of $20 a month because that's all he can afford. The result is that it will cost him about $620 to buy that television. Joe should have just saved the money in the first place.
Secondly, if Joe takes out a loan because Joe fundamentally can't afford what he is getting, then taking out a loan is the last thing Joe should do. The only case in which he would want to take out a loan is if he is using the loan to make money. I.E. Joe's investment of the loan makes money relative to the cost of the loan. (Buying a house is a good example as house prices are likely to increase more than the cost of the loan. Plus the time it takes to save that amount of money would mean that Joe might be dead ore really old by the time he could buy the house.)
Third, if Joe really needs a loan for $500 and he is using it to buy a consumer item, he may never be able to pay back, and certainly not quickly. Alot of companies have gone bankrupt for this reason and others have made fortunes over skating the other side of that line. In any case it probably isn't good for the customer to be borrowing that amount for that long.
Finally, (and perhaps most importantly) if he can't afford the TV he shouldn't buy it!! I think this really gets at the heart of the issue. People are spending money on consumer goods instead of building equity in a house or trying to get ahead at work or something else to improve themselves. They are using loans as fun money, or to cover extravagant living expenses. Credit cards are basically enabling this lifestyle...for a while and at a cost that mostly falls on the consumer.
However, credit cards do meet several very real needs.
1) They can help provide a cushion if cash flow cuts out or is intermittent for an individual.
2) They help build credit. For me I love credit cards, because otherwise it would be very difficult to get a mortgage in 5 years when I need to.
3) They work great as a payment vehicle (online transactions and not carrying cash), as a bargaining tool for consumers (lowering prices and negotiating overcharging), as protection for consumers (credit card fraud is alot easier to deal with than check fraud which can send you to prison), and as a way to track spending.
Not only are there all of these good things, but there are tons of people for whom managing credit is not a problem. And the occasional loan is very good. For example I had a friend who was going to get a great job, but didn't have any money, so he used a credit card to foot the bill for a life changing trip to Europe in the summer after college. He has almost paid back that loan in full.
However, as previously described credit cards are dangerous to many people. They can lead to a large amount of debt that really isn't beneficial to the customer. True that $500 debt doesn't really kill alot of people, but it doesn't help it's just not good.
The weird part is that when you try to help these people they get angry. Raising the minimum monthly payment of a credit card to 10% of the total balance would be a huge help because people would actually have to budget, but they would probably never use your card. They will chose someone else's card that is worse for them even though they know (almost everyone knows credit card debt is a bad idea, even the really poor among whom someone who is using credit is the poorest; debit is more well respected) that because it looks more attractive.
It's basically greed and coveting. It's those same desires that lead men to sleep with their neighbor's wife. They know it is wrong, but it is just so attractive, and no one will know just you and the credit companies...
So is it okay to work for a business that makes alot of it's money off of people's greed and stupidity? I am not yet sure. But I know that most people wouldn't be against companies like Best Buy or Sharper Image where credit cards are being used constantly to buy things people don't need, but just want really, really bad.
I think for now I am okay with it. My company is working hard to make the industry better, and ultimately wants to change the face of all lending and banking. Maybe we can educate customers or work to make tougher regulations in place for minimum payments from the federal government. As long as I remember that my role is to make things better for my customers then I will seize every chance to make those changes that will help others.
posted by Adam Harris at 9:32 PM
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