1. You are not counting the cost of losses. About 8% of credit cards default, so the banks lose money. There are predictions that these losses will go up to 10% or more with mounting unemployment. For example, if you lend 10 people $100 for a year and you are earning 10%, then your profit after a year will be $100. But if one of these people defaults, this will cost you $100, so you’ll get no profit at all. The interest has to be high enough to offset the risk of generate profits.

2. Banks are not charitable organization, their first responsibility is to shareholders. Certain loans are at lower risk – e.g. real estate (with conservative lending practices) where the sale of a home would offset losses, hence the interest is lower. Credit card business is high risk since those that are most responsible are paying in full and don’t generate profit whereas those who do generate profit aren’t as good with money. High risk = high reward.

“How is a spread like that anywhere near fair? Why can’t the consumer borrow from the Fed at the super low interest rates, and cut out the credit card companies?”
Life is not fair. Fed cannot provide nearly enough money for everyone. Not all banks borrow directly from the Fed directly, and even those that do lend a lot more than what they get from Fed. Most money for lending, come from our deposits. The banks normally put about 10% in reserve, and lend about 90%. The income on this 90% should be enough to 1) pay interest on all deposits, not just this 90% 2) offset losses of defaults 3) generate profit. Right now banks keep a lot more money in reserve than normal as a cushion against future losses. The risk of defaults is higher as well.

How is a spread like that anywhere near fair? Why can’t the consumer borrow from the Fed at the super low interest rates, and cut out the credit card companies?

The US has a huge trade defecit, and produces alot of BS and hot air, and little of value.

Wages are stagnant, as credit goes stagnant, the retail stores go bankrupt, and that sends the malls into bankruptcy as well. The bankrupt banks being bailed out on the taxpayers dime probably own alot of the commercial mortgage backed securities that are gonna tank next.

The corporations and banks have slit their own throats.

Instead of talking about “personal responsibility” the discussion should be about government and corporate responsibility to the nation they are supposed to be loyal to. The USA.

You can do all the things you mention using debit cards. You can also pay use a credit card, but do not spend any more money than you actually can afford to repay. This is not that difficult.

Yes customers with good credit can switch. They can, for example, switch to a 0% offer, use it for a year then switch to another one. As long as they aren’t ever late – not such a challenge with automatic payment – they can do it until they repay their debt. After that they can start to not charge any more than they can actually afford.

Hah! Sure. Operating in today’s economy without credit cards is trivial. No problems. Just don’t buy from catalogs, or from web sites, or rent cars. Oh and don’t try to get reserved for late arrival at a hotel. Or even a reservation in the first place. Etc etc etc.

Customers can always switch. Sure they can. To another bank that can and will do the same things as the old bank did. Big help. The whole system is still wild west and that’s the problem.

People who pay in full are a drag on the system. They always have been. Banks get a few percent in merchant fees from their accounts but overhead of managing their accounts deducts from that. I agree that removing the ability to exploit economically marginal accounts will lead to less credit for them and higher fees to non-revolvers to make them profitable. That’s fine with me. I never use the rewards (most are of little value to me) even cash back options are trivial amounts given how little I use my card (I’m a cash kind of guy).

Your arguments are equally try of snake oil salesmen. Nobody HAD to buy snake oil. Yet people who were desperate DID buy it. And snake oil sales men peddled “cures” that were in some cases toxic. Adding some regulation made snake oil unavailable for the people who wanted it. It also increased the price of medication for sick people. I’m glad we made those sacrifices. (Of course we’re heading too far in regulation there now but that’s a different debate)

Nobody forces people to use credit cards if they don’t like the terms. It’s not a necessity. Frank told it best – it’s a contract between two parties both of which voluntarily agreed on terms. Mortgage contract has one terms, credit cards have other terms. It’s not true that you cannot switch to another card, even if the terms are the same, there are always promotional offers if your credit is good. If someone carries a balance but has good credit, he can take a promotional offer from another card and transfer the balance there. A couple of friends of mine were shuffling out of pocket costs from cancer treatment (if you think your 8 months or so emergency fund is enough for this type of costs, think again) for their loved ones between 0% cards until they repaid it. When or if these regulations take effect this type of offers will disappear.

These regulations will hurt those of us who pay in full: it will reduce the number of rewards, cash backs, it may even cause banks to reduce grace periods or introduce yearly fees.

You think these regulations are reasonable, but disagree with the reasons given by the people you quoted. So what are your reasons for believing that these regulations are, in fact, “reasonable”?

Secured or unsecured is not the issue. Mortgages have always had terms fixed at closing. Even adjustable rate mortgages have limits on the time and size of the adjustment and fixed criteria for doing when the adjustments happen. Banks have to live with this because their competitors all use real contracts of this type. If they tried to impose credit-card like terms (i.e. bank can change them on a whim) they would be driven out of the market place by competitors with more reasonable terms.

Credit cards have traditionally had worthless initial terms presented to the consumer. Actually stating any terms in the initial agreement is misleading since it implies that those terms will remain unchanged. I know the terms say they can change at any time but people don’t read that to mean “we reserve the right to rip you off later – and we will.” They should read it that way but don’t. I guess they expect fair treatment. How naive. When I think of credit card issuers I think of Darth Vader in cloud city.

Banks have a market opportunity with credit cards to abuse and exploit their customers because ALL the banks use these sort of one sided agreements. It’s the contractual equivalent of the wild west. Until the marshall comes to town and imposes order we’re all subject to banditry.

Sensible regulation is a good thing. I don’t want the government to dictate terms or issue cards. I just would like to see them impose a reasonable set of guidelines to eliminate the worst of the abuses.

And BTW – I never carry a balance (though I did when I was younger) so this doesn’t really affect me. I just hate seeing these sorts of abuses go one for so long.

WRT people who can’t afford to pay credit being unable to obtain it. How exactly is that a bad thing? Currently the card issuers exploit those who CAN pay to cover up for their lousy loans to those who never could pay. Coming back to the mortgage analogy – if banks COULD raise everyone else’s fees in order to cover up their sub-prime losses I have no doubt that they would.

Your first line is exactly what I was thinking. The government has to listen to the people — political points are still to be made. And since we’re Americans, we demand to be heard.

The victim point has been made over and over and I totally agree. Yet on the other hand, we all can acknowledge that some practices (like raising rates for falling behind on an unrelated bill, or raising rates unannounced) isn’t right. But hey, you sign the contract and you become their (as JLP said) “slave.”

I’m for the CC regulations, lets just not take it too far.

-Tim

You are probably right. There is a “now” mentality that will likely be unaffected, regardless.

A small andectdote of my own. I worked at a grocery store in my youth. I NEVER saw a hispanic coming through the line paying with anything other than cash. I was infuriated when I had to cashier groceries for someone using WIC and/or food stamps who was buying food MY family couldn’t afford. I get your point and it’s well taken.

Have a good weekend everybody!