Thursday, April 23, 2009

Gimme Credit

What ever happened to the concept of personal responsibility? I seem to remember a time when people actually blamed themselves for their own bad decisions. If they got caught speeding or even if they lost some money in the market, they simply said, "It's my own damn fault!" Today, however, that's the last thing on their mind. If things don't go the way they hoped, they immediately try to find someone else to blame. Sometimes, of course, they are right to do so. Yet all too often, their loss really is their own damn fault.

The problem is that even irresponsible people get to vote. Which explains why politicians are so eager to listen to them. For example, politicians are now falling all over themselves to blame the banks for charging too much interest on credit card purchases. The consensus opinion--at least among some in the political class--seems to be that consumers were somehow duped by the banks. That it wasn't made clear to these innocent consumers that someday they would have to pay back the money they borrowed--with interest no less!

I simply can't buy this argument. I have been using credit cards for at least a few decades. I have been receiving solicitations for even more credit cards for almost as long. I cannot remember one instance when an offer for a card did not clearly state the interest rate I would be charged. I cannot remember one time that I was not notified by the issuer of a card I already owned that it was planning to raise the interest rate. I cannot remember one credit card bill I ever received that did not clearly state the finance charge.

So just exactly how have the banks deceived us? It doesn't take a rocket scientist to avoid paying interest on a credit card. There are at least three ways that come to mind: 1) Don't use the credit card. 2) Use the credit card, but don't buy more than you can afford; and make sure you pay off the balance within the grace period. 3) Buy more than you can afford at this very moment, but only if you are certain that you have enough cash flow coming in before the grace period ends.

There is a very simple rule of thumb in the credit markets. The higher the risk of the borrower, the higher the interest rate charged. This is exactly why BB rated companies pay higher interest rates to borrow money than do AAA rated companies. And this is why banks will issue credit cards to high risk borrowers, but only at higher rates than they charge borrowers with good credit scores.

It seems what the politicians really want is for the banks to lend money for free. Even if this is good public policy, it makes no sense to a business trying to earn a profit. Let's not forget, however, that the government is now running many of our financial institutions. Profits have taken a back seat to public policy. This is the inevitable result of nationalization. Yet if the government forces the credit card companies to reduce the interest rates they charge, there will be less credit available to the very borrowers the government is trying to protect. On second thought, maybe that's not such a bad thing after all.