Credit Cards

In their paper, researchers Manoj Thomas (an assistant professor of marketing at Cornell), Kalpesh Kaushik Desai (an associate professor of marketing at State University of New York, Binghamton) and Satheeshkumar Seenivasan (a doctoral candidate at State University of New York, Buffalo) make a pretty authoritative case that grocery shoppers who pay with credit or debit cards tend to purchase larger quantities of unhealthy food. Basically, when you pay with cash, the theory goes, you tend to weigh your purchases more carefully. Credit and debit cards, on the other hand, seem to encourage impulsive behavior. Or, as the authors put it, “the abstract and emotionally inert nature of card payments … reduce the pain of payment.” Whereas, cash hurts , and “visceral responses such as feelings of pain can extinguish consumptive desires. With the extinction of desire, vice products no longer seem so appealing.“

(I think the Buddha taught something along those lines, though I’m not sure he backed it up with peer-reviewed data. Read between the lines, and not only will you shed some pounds, but you could also avoid some disastrous relationships.)

The argument jibes very nicely with the explanation for why, historically, tax cuts that are not matched by spending cuts actually result in increased government spending — for the citizenry as a whole, the pain of payment for products received has been eliminated. When we receive government services without paying their full cost, we consume more such services. If every spending initiative had to be matched by a tax hike or cut elsewhere in the budget, we would end up behaving much more frugally. But starving the beast just makes us more profligate.

On Aug. 23, the Wall Street Journal reports, citing data covering the second quarter of 2010,  “issuers responded by pushing card rates to their highest level in nine years.”

The juxtaposition jibes all too nicely with the warning frequently voiced on the Journal’s opinion pages that any attempt to reduce credit card company profits by clamping down on exorbitant fees or arbitrary, outrageous interest rate hikes would be answered by higher across-the-board interest rates and scarcer cheap credit.

To her credit, Journal reporter Ruth Simon gives some room to people pushing back on this thesis. First, there’s New York Democratic Rep. Carolyn Maloney, the sponsor of the CARD Act:

Rep. Carolyn Maloney (D-NY), said that despite the rising rates, the law benefits consumers because it eliminates unwelcome surprises and provides them with a clear picture of the costs they will face. “Better that consumers should know up-front what the interest rate is, even if it’s higher, than to be soaked on the back-end by tricks and hidden fees.”

Then there’s the kicker, in which a banking lobbyist notes that, once the economy improves, competition will inevitably offer borrowers lower rates.

“This is a very competitive industry,” says Kenneth Clayton, senior vice president at the American Bankers Association, a trade group. “Somebody will take advantage of lower defaults to drive prices down.”

In fact, it will be easier for banks to compete, and for borrowers to choose. A lower interest rate, in theory, will mean exactly that: a lower interest rate, instead of an interest rate that is only lower because the bank intends to make up for lost profits with an avalanche of fees.

The Journal doesn’t give us too much detail on the new rules. Let’s pick out just two: Late fees can no longer be larger than your minimum payment, and you can’t be charged multiple fees for a single transgression.

For example, under the old rules, you could miss a $10 minimum payment, and get slapped with a $30 fine. And if the $30 fine happened to knock you above your credit limit, you could get hit with another fee for breaking that rule, too.

Maloney is right: Getting upfront information about how much your credit will really cost is a feature, not a bug, of the new rules. And if that means less accessibility to cheap credit, is that entirely a bad thing? The illusion that money was cheap fostered bad behavior at every level of the U.S. economy prior to the great credit crunch. Now, as documented by the Federal Reserve Bank of New York’s quarterly report on household debt and credit, Americans have been closing their credit card accounts and paying off their outstanding debt. Perhaps if credit had been more expensive to begin with, we wouldn’t have gotten in so far over our heads. And perhaps the real reason that the credit card companies are raising their rates has more to do with the fact that prudent consumer behavior is cutting into their bottom lines, than to the new rules.

And yes, of course the banks will find ways to game the new rules. But that’s why we now have a Bureau of Consumer Financial Protection to guard our backs. So let’s get Elizabeth Warren on the job, pronto!

According to the recollection of South Dakota’s governor, Bill Janklow, after the bank convinced him a change in the laws would bring jobs to the state, Citibank drafted a law revoking usury limits and the legislature passed it in within 24 hours. Citibank promptly relocated its credit card business. The move set off a chain reaction, as other states strove to duplicate South Dakota’s success by promptly getting rid of their own usury laws.

The same kind of chain reaction, argues Klein, would take place if Congress allowed health insurers to sell across state lines. Insurers would cluster in states with minimal regulation and with predictable results, according to an analysis conducted by the Congressional Budget Office in 2005.

Klein:

The legislation “would reduce the price of individual health insurance coverage for people expected to have relatively low health care costs, while increasing the price of coverage for those expected to have relatively high health care costs,” CBO said. “Therefore, CBO expects that there would be an increase in the number of relatively healthy individuals, and a decrease in the number of individuals expected to have relatively high cost, who buy individual coverage.”

That is to say, the legislation would not change the number of insured Americans or save much money, but it would make insurance more expensive for the sick and cheaper for the healthy, and lead to more healthy people with insurance and fewer sick people with insurance. It’s a great proposal if you don’t ever plan to be sick, and if you don’t mind finding out that your insurer doesn’t cover your illness. And it’s the Republican plan for health-care reform.

(Note: While researching this post after reading Klein, I discovered that LaRae Meadows, an OpenSalon blogger, published almost exactly the same enlightening information back in September. Nice work!)