Parasitic Credit Card Companies

David GlasnerA favorite tactic of the credit-card industry is to offer customers zero-interest rate loans on transferred balances. Now you might think that banks were competing hard to drive down the excessive cost of borrowing incurred by many credit card holders for whom borrowing via their credit card is their best way of obtaining unsecured credit. But you would be wrong. Credit-card issuers offer the zero-interest loans because, (a) they typically charge a 3 or 4 percent service charge off the top, and (b) then include a $35 penalty for a late payment, and then (c), under the fine print of the loan agreement, terminate the promotional rate on the transferred balance, increasing the interest rate on the transferred balance to some exorbitant level in the range of 20 to 30 percent. Most customers, especially if they haven’t tried a balance-transfer before, will not even read the fine print to know that a single late payment will result in a penalty and loss of the promotional rate. But even if they are aware of the fine print, they will almost certainly underestimate the likelihood that they will sooner or later miss an installment-payment deadline. I don’t know whether any studies have looked into the profitability of promotional rates for credit card issuers, but I suspect, given how widespread such offers are, that they are very profitable for credit-card issuers. Information asymmetry strikes again.

—David Glasner
Is Finance Parasitic?

4 thoughts on “Parasitic Credit Card Companies

  1. When my mom knew she was dying, she signed up for every credit card and balance-transfer scheme on Earth. It paid the bills while my youngest brother was finishing his senior year in high school.

    When she died, another brother (he worked for Guvernator Ah-nold’s people, and was allowed to work online from Oregon for six months, so Ah-nold’s people weren’t all bad) handled calling the credit card companies and telling them they were SOL. One actually said “wouldn’t you like to honor her memory by paying her debts?” The sheer chutzpah of that line got applause from all of us brothers.

    (I’m rather surprised Republicans haven’t tried passing a law making descendants of debtors responsible for their dead parents’ bills, actually.)

    Of course finance is entirely predatory. Banks make way more money off fees than they do the old 3/4/5 of our youth (pay 3% interest to investors, make loans at 4%, go golfing by 5:00 PM.) Credit card companies actually have a term for people who pay their balance on time; “deadbeats,” since those people actually lose the companies a small amount of money. Don’t even get me started on “tax preparers” who are basically just payday-loan usurers.

    Like most powerful American companies, finance is basically about rent collecting and adds absolutely nothing to the economy. Oddly, the only government-owned bank in the country is the old state bank of North Dakota (yes, in the time before time, North Dakota was liberal.) It did fine during the 2008 crisis since it wasn’t in the housing-derivatives game, and North Dakotans cherish it as a valuable institution. Mind you, they hate every other form of government, and are busy blaming their massive deficits on Democrats, not the tax cuts they passed when oil money was flowing freely.

    • I’m relatively fond of Schwarzenegger. He was a horrible governor, but that’s okay. He wasn’t as bad as other Republican California governors. And I will always love him for his speech at the 2004 RNC where he spoke lovingly of listening to Richard Nixon. In addition to my having a major soft spot for Nixon, it highlighted the fact that Schwarzenegger had a major case of the immigrants’ delusion. This is where immigrants are attracted to the Republican Party because of its rhetoric, never figuring out that it is just rhetoric and that its policies are exactly the opposite.

      I’m a little more pro-bank than you are. I do see that there is a value in getting resources from people who can’t use them to people who can. But the example you give is perfect for explaining why this is largely not the case anymore. The whole 2008 financial crisis was about the banks creating a lot of paper that, if it reflected conditions as they normally were, would have indicated a lot of actual money. But creating a bunch of people who owe more than they can ever pay just ends in bankruptcy. Of course, this is why the banks have gotten Congress to make individual bankruptcy much harder (even while corporate bankruptcy is easier).

      I’m sorry that your mother died (apparently much too young). But the story is great. I love how banks use moral arguments against you that they would never apply to themselves. It’s like employers who fire employees at the slightest sign of a downturn, but complain that their employees aren’t loyal.

      I assume that ND is like everywhere else in the US: liberal up to the point that the Republicans managed to associate the government with helping “those people.” Disgusting really. Not that I’m implying that the people who live in North Dakota are bigots. I’m saying it straight out. What? You say that North Dakota is so white, how could they be bigots? Well, that’s the way it tends to be. It’s like people who live in low crime areas want harsher penalties for people who break the law. (That’s also mostly racism.) But in the defense of that great state that has two more US Senators than it should have, it is no more bigoted than most of America.

      • “Not that I’m implying . . . I’m saying this straight out.” Yeah. North Dakota is pretty spooky. Some years ago I visited T. Roosevelt N.P. there and the young man at the visitor center said “thank you for wearing that shirt.” I had a Star Trek shirt on. As if that was the least hillbilly redneck shirt the poor guy had seen in months. Creepy drifters in local cafes, too. Any job boom that attracts 100% males is going to have more than its share of shady-eyed characters lurking about.

        And yet immigrants did and do come there, looking for work, because immigrants are the bravest people in the world.

        • Absolutely. Immigrants really are what has made this country great. And the distinction between legal and illegal is meaningless. It has only been a hundred years since there was even the idea of immigration laws. Before, people just moved. And it has only been about 40 years that it has been a crime for undocumented people to work here. In the one most important defining aspect of America, we are getting worse.

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