Here’s a perfect example of why the American public has the right to be a bit concerned about health care regulated by the federal government. Massive regulation of private companies never quite works out the way you expect.
Credit cards are evil. Everyone should be taught this starting in elementary school. And for that reason I can understand some government regulation, like, for example, saying that you can’t actually charge someone a 100% or more interest rate, or you can’t arbitrarily change the terms of your customer agreement without informing customers with appropriate notice, or you can’t set a minimum payment so low that the person only ever goes further into debt, rather than gradually paying the card off. I can even understand requiring companies to clearly publish in bold print on the back of every statement that if you default, your rate could double or triple or whatever.
Also, I believe that credit card companies should be held accountable for mistakes. If they accidentally or mistakenly ruin your credit, they should be fined extremely heavily — thereby discouraging them from implementing policies that would ruin your credit on a whim.
All of this seems reasonable. And all but the last thing has basically been in place for years.
I had a great relationship with my credit cards. I had one rewards card for the past decade or so, and they’ve probably paid me over $1000 in rewards, and I think I may have paid them $15 in interest one month when I was moving and carried a balance while my banks were getting sorted out. I recognize that my rewards are subsidized by other people who pay interest every month, but I’d happily trade such a card for one with no rewards and a better interest rate. I only take the rewards card because, well, it’s available.
When I got married a couple years ago, my spouse had some credit card debt, and it got more significant leading up to the wedding. I can understand how one falls into this trap; it started when she was a student and didn’t have enough income. And then she had gotten into the typical American consumer pattern of paying a little off, putting a little more on, etc. All the while, the balance kept growing just slightly each year. No matter how much I had encouraged her to be disciplined about it, it wasn’t working.
So I said — “Look, I’m going to zero your cards out and put all that debt on a new card I get. Just keep your balance at zero every month from now on.” She’s been pretty successful at this, since “zero” is an easier goal to achieve than the continuously fluctuating balance that rises and falls each month and is never quite paid off.
Meanwhile, because I have excellent credit, I used to get offers for awesome credit cards all the time. One company, which has a pretty good consumer reputation, sent me an offer for a 5.99% FIXED rate credit card. Same rate for balance transfers. No balance transfer fee. So I could transfer my wife’s debt to this card, and then pay it off with a rate that would remain 5.99% forever. That rate is better than a lot of actual loan rates, so this sounded fantastic.
Keep in mind that I only got this deal because I had shown that I was an extremely responsible consumer for the past decade. I was very, very low risk, so I got a very, very good rate. And I held to my bargain, making regular payments on this card every month, and the debt gradually started to shrink. I could have paid it off in bigger chunks, but given that the rate was so low, it actually made more sense to save money and invest it, or put it into a rainy day fund (which had been depleted by our wedding).
[cue ominous music]
Then the federal government stepped in. They passed a law that would help people saddled with credit card debt and supposedly make it more fair for everyone.
Now my rate on that card is 12.99%. The rate more than tripled (from 5.99% to 18.99%) after the card company stopped offering fixed-rate cards, since such rates would be riskier for them, in the event that I did default in the future, and they couldn’t change the terms because of the new law. I was offered no opt-out provision, since they weren’t required to give me one. I would have closed the account to keep the rate, but that wouldn’t have helped. The third representative I talked to was helpful enough to lower my new rate from the original 18.99% to 12.99%, but that’s still more than double the rate I used to have.
I obeyed the rules that are clearly marked on every statement I receive. I don’t try any shenanigans. I don’t go over my limit; in fact, I don’t even approach my limit. I pay on time. I don’t miss payments. I don’t try to pay at the last minute and complain that payments don’t get processed on the weekend or after a certain time of day or whatever — I make the payment as soon as the card comes in, or I set an online payment that is at least a week before the due date. I do that for all my bills. Mishaps happen; why take a chance trying to pay something at the last minute? Is it really that hard to save for a couple months so you can make payments a week or two earlier, rather than at the last minute every month?
Both sets of my grandparents probably never had a loan in their entire lives. Well, one set may have had a mortgage on their home at first; I’m not sure. But for everything else, they paid in cash. They bought cars with cash. They bought property for my parents to build their house on with cash. When my brother needed help buying property for his first house, my grandmother wrote a check for a good portion of it. When I needed my first car (a relatively inexpensive used one, but still thousands of dollars), my grandmother wrote a check to pay for it in full. My grandparents weren’t rich people at all. They earned below-average blue collar wages for their entire lives. But they simply believed in the idea that you save money up and then spend it, rather than racking up debt and trying to get out. When they did have credit cards later in life, they always paid them off every month.
I don’t expect people to be like my grandparents. But if they do use credit cards, they need to follow the rules. Credit cards should always be a lending source of last resort because of their high interest rates. The interest rates are high because banks do a much less-thorough evaluation of risk than they do for other types of loans. If you really need money, take out a loan. If you don’t have equity or property to provide collateral for a loan, you’re spending too much. It’s that simple. I know it seems like you need all these things, but you don’t.
There are people who are working at minimum wage and trying to raise a huge family with lots of kids, taking care of aging parents, and have huge amounts of health care bills. Okay — those people might find themselves in a tight spot, but there are usually various safety nets to try to help those people, including various charitable organizations. Yet I understand if they mess up and end up with credit card debt. But the vast majority of credit card users have no such excuse. You lost your second home or your first home that you couldn’t afford because you took out a mortgage that was ridiculous and lost your job? Sorry, but I have no sympathy for you. You’re an idiot who was trying to live beyond your means. Deal with the consequences. Don’t whine that your credit card companies are persecuting you by raising your rate when you missed a payment, went over your limit, or didn’t credit a payment you made minutes before 5:00 PM on your due date. If you’re over 30 years old and don’t have enough money in the bank to keep yourself afloat for at least 6 months in the event of some unexpected calamity, you need to stop spending right now and start saving.
People use money in stupid ways all the time. They take out mortgages they can’t handle, they buy cars they can’t afford, they gamble thousands of dollars away in casinos, etc. Even if you regulated all of these things, people would spend their money away on vacations, booze, whatever — regulation will just cause them to find new ways to spend money.
Who am I (or who is the government) to tell them how to spend their money? If they choose to enter into a stupid agreement with a credit card and then rack up debt, that’s their own fault. (There are of course situations where people end up in debt supposedly involuntarily, say over health care — but if that’s a problem, fix the health care system, or provide alternative loan sources for such people. I don’t see how we should justify regulation of a bank because some other sector of our economy is broken.)
I do believe there is room for improvement for credit card companies. In particular, I think consumers need to be provided with reasonable remedies if their bank makes an error and messes up their credit. But in the vast majority of cases, if you followed the rules, everything was fine. You had a cardholder agreement — which, by definition, you agreed to — and if you didn’t satisfy that agreement in some way, the bank took appropriate action. If you don’t like those actions, don’t use the card!
And yet now I have to subsidize those idiots who can’t manage money. My rate more than doubled, and I will probably not be able to get a low fixed-rate card with anyone anymore. Needless to say, I dipped into reserved savings and paid off that debt rather than carrying it as I was. The credit card company lost quite a few hundred dollars (maybe over a thousand dollars) in interest that would have been paid as my wife and I made gradual payments over the next few years. But with an interest rate higher than potential investment returns, there’s no reason for me to keep paying a credit card company. I also feel sorry for the idiots at the credit card company that didn’t believe me when I said they’d lose hundreds of dollars by changing my interest rate.
And even among those people who aren’t like me, many of them are complaining about new abuses by credit cards. Card companies, who are afraid of the new restrictions, are preemptively doubling many consumers’ rates, even long-time customers who have made regular payments for years. For those people who did get into debt but are now gradually working out of it (or even holding it steady) by making steady payments every month, their payments may have just doubled. For people on a tight budget, Congress has now just ruined their lives. If my wife had her previous debt situation, which was relatively stable, suddenly it would have become impossible for her. And it probably would have sent her into a credit-card debt spiral — all because of government trying to help out people who whine after they make bad decisions.
Basically, people who follow the rules and the agreements with their card companies got punished, while people who whined about random things happening to their interest rates got a reward for doing stupid things. Except those random things were almost never random. They were missed or late payments, over-limit charges, or decreased credit scores due to their taking on more debt or being late on payments in other areas of their financial life. You know what? Studies have shown that all of these things make you a more risky credit card customer, and thus you should be charged more because your risk of default is higher. That’s how loans work. You can argue that the rates are ridiculously high, but you’re the idiot who got into such a contract in the first place by using that card and then making yourself a greater credit risk.
How does this relate to health care? Well, basically the federal government, in the process of instituting a process that will make things “more fair for all,” ended up harming those who already had a system that worked for them. The only people whose lives were improved were those who were irresponsible or delinquent or had some sort of catastrophic hardship. Well, I can see an argument for helping out those few who have a catastrophic hardship, and perhaps there should be a federal health-care safety net for such people. There already basically is, since hospitals generally can’t turn people away from emergency care. We can argue about the economic consequences of uninsured people going to emergency rooms (and various solutions to those problems), but for each person saved by total federal regulation of health care, probably dozens more will see their own health care — which already works — screwed up by regulations that aim at the lowest common denominator.
Don’t get me wrong — in principle, I’m not against some sort of government-sponsored health-care safety net. But that’s different from government regulating and interfering with private business on a massive scale, which, as we’ve seen with credit cards, ends up helping a few while screwing over people whose system already works.