Saturday, March 05, 2005

Big bad credit card companies.

Is there anyone out there who doesn't understand that credit card companies will hit you with fees and interest when you miss payments? So what is Kevin Drum's beef with the business? Where's the market failure? He suggests that business' influence over bankruptcy legislation creates a moral hazard problem for lenders, but isn't that the wrong way around? People can borrow money from credit card companies, knowing that they can file for bankruptcy. Arguably, the law closes that loophole. This is not to say that I support the proposed legislation, but we ought to be arguing on the basis of something other than easy scorn for credit card issuers.

The fundamental thinking here is that interest rates charged are proportional to risk: my risk of not repaying my loans is low, so I get a low rate of interest (low cost of borrowing money); someone with a less steady job and credit history is charged more because there is a risk that they won't repay. A "fair" lender, much like an insurance company, charges rates that are actuarially related to the risk involved.

The ability of the debtor to go into bankruptcy is a large part of the risk. If the law changes so that bankruptcy doesn't get you out of CC debt, then there's no actuarial justification for the high rates.
Usually we defer to the judgment of people in the marketplace about whether rates are low or high, and I'm not hearing a suggestion that there's deception or trickery on the part of the credit card companies -- hence my suggestion that everyone knows you get whacked if you don't pay your bill.

And there are a lot of companies issuing credit cards -- it seems like a pretty competitive market. So wouldn't competition prevent companies from gouging?
I guess, banks aren't guilty that people run into debt and file for bankruptcy. It is a problem of us each to learn managing our finances. If you spend money wisely, you won't have any problem, really.
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