The Credit Game
Watching the mortgage meltdown go from bad to horrific to George Romero has got me thinking about credit in general.
Credit is an odd thing; the more credit you use the more credit worthy you become. Even if you are making insane purchases, so long as you make your monthly payments, you can get more credit - and probably easily.
By contrast, a person who rarely uses credit faces trouble getting credit even if they have never missed a payment, never declared bankruptcy, never been financially irresponsible. A friend of mine was trying to buy a house a couple years back. He’d always paid his bills on time, didn’t have credit cards, had his car paid off. He couldn’t get a mortgage even though he made good money. He went out, opened a credit card account, bought some stuff, paid for it, bought a small car, made the payments, then qualified for a mortgage even though he was deeper in debt than he was initially.Â
Think about this - if you use credit reguarly, keep your payments current, you can get more credit at often extremely low rates. On a regular basis, my friends and coworkers complain about the flood of credit card offers they receive. Many of them offer zero percent interest for balance transfer for 12 months or longer.
The credit card companies are making the good bet that you won’t just use their card to reduce the interest rate on your revolving credit. Consistently, American consumers have shown a willingness to continue to spend even when we’re out of money. We will use our credit cards - and pay the interest, fees, and other charges that go along with them.
A few years back, a friend of mine was facing serious financial problems. She debated declaring bankruptcy. At the time, she kept receiving these offers of low or zero percent interest on balance transfers. So she took advantage of them. She would pick through them and accepted those without transfer fees, moving her money from card to card to card. She said, “I don’t make the rules. It’s their game - I’m just playing by their rules.” A completely accurate statement and one she used to her advantage. IIRC, my friend played the balance transfer game successfully for a while - then started using her cards again - charging larger and larger amounts until she had to start the balance transfer game all over again.Â
It’s not just credit cards. Home mortgages, for instance. If you have a home mortgage and pay on a regular basis, and go to the bank and ask for a refinance or home equity line, you’ll get it easily. And you can probably stretch out your repayment for ten years and write the interest off on your taxes.
By contrast, someone who desperately needs the money, especially if they are working class, has to go to a payday lender, pay 520% and gets 8 weeks to pay it back.
I’m struggling to define the problem accurately. Easy credit isn’t the answer, as the mortgage meltdown proves. I’m not convinced maker credit a lot more difficult to access is the answer either. My grandparents got their home mortgage in the early 40s in Salt Lake City. They had to have 20% down before they could even be considered for the loan. But what’s the average house price in the Salt Lake valley these days? $300,000?  How many of us could save $60,000? Coming up with the five or ten percent down is a stretch for most of us.
It’s equally obvious that the problem isn’t solely the problem of the credit industry. The ways in which consumers use credit is part of the problem. Far too many consumers get over their head in debt then try to figure a way out - usually through more debt. How many people have used their home equity to pay off their revolving credit and then continued to run up their credit card debt? How many people (okay this is me) seem to have to keep relearning the same lesson about credit cards. Don’t carry them unless you need them. Don’t buy anything on impulse. Don’t buy anything you don’t need. It’s way to easy to use them and before you know it, you’ve spent thousands of dollars with little or nothing to show?
I’m not sure the metaphor, but it feels as if the desire of the financial industry to generate profits has meshed in an unhealthy way with the desire of consumers to always have more, to have new stuff all the time. We spend, they encourage us to spend, we encourage them to give us more credit so they do and it all goes around again. Each purchase creates part of our credit history - good or ill - and each part adds up to create a picture of credit worthiness (or not).
FWIW, I wonder if my grandparents use and model of credit was one worth copying. They borrowed money only on their house and cars. Everything else could wait. My grandmother invested every single month of her life. Some months it was a tiny amount, but she never went a month without doing it. When she retired, she knew she’d never have to worry about money again. She wasn’t exactly a tightwad, but she was frugal. She always had nice clothing - and she bought good quality clothing.  My grandmother seems to have believed it was better to have seven good quality, expensive shirts than 35 crappy ones.
As I said, I wonder if at least part of the problem is our cultural attitudes toward consumption, spending, and saving. But there’s also the profit motive for creditors who are willing to bet that consumers will somehow find a way to pay rather than harm their credit worthiness.Â
Which brings me to a final point. I’m seeing reports  like this one that suggest we’ve reached a point where American consumers are doing apparently insane things:
Seven years in the credit-counseling business didn’t prepare Ann Estes for the alarming trend she began noticing last fall: As her clients’ mortgage bills became unaffordable, a growing number of them began paying their credit card bills before — and sometimes instead of — their mortgages.
“We’ve never seen anything like this,” says Estes, who counsels clients by phone from her office in Richmond, Va. “Their homes are at risk, and they know it. But people say, ‘I don’t want to let my credit cards go because that’s my cash flow.’ “
The pattern described here is one arising from despair and one that can only deepen our national economic woes. Right now apparently the US is the world’s eocnomic basket case.
I think what we’re seeing here is a case of a complete systemic breakdown - one that is past the tipping point.
March 7th, 2008 at 12:23 pm
You may be surprised to hear but I think the way credit ratings are managed by credit reporting agencies is one of the most repressive tyrannical systems ever devised by man. If there is one thing that keeps people in poverty it is out credit rating system. A credit rating is no longer just a number that allows you to get a loan. It will now keep you from getting a good job, pay raises, promotions, and housing. It has become a defacto debtors prison that is very difficult to get out of. These credit reporting agencies act on the premise of guilty until you can prove yourself innocent. They are not required to keep accurate records unless you press them on it, and even then it can be difficult to get them to act.
I recently bought a new car and was shocked to see that my credit report showed items that I had paid off years ago that had not been reported as paid. Now it is my responsibility to contact the credit reporting companies and my old creditors to fix these items. This has caused me great damage, but my only recourse is to try and get them to fix their mistakes?
Credit reporting agencies should be required to keep real time up to date records and if they do not they should be required to pay damages and penalties to us who have been victimized.
March 7th, 2008 at 12:44 pm
Ken - I’m not surprised at all. I think any consumer who has dealt with the credit agencies feels the same way. I recently found some weird errors on my credit report. I’ve written letters, made calls, but they’re still there. It makes me crazy.
I agree that the credit agencies should be requires to keep up to date records and they should face penalties if they don’t. They have too much power to not be held more accountable.
March 7th, 2008 at 4:07 pm
I’ve never held a job in advertising, but I’ll bet every commercial artist knows they have to portray things they promote as something you NEED, not just something you want. Nobody likes to think that they’re so stupid as to be programmed through repetition, but we are. Repetition works!
We are told and we believe that without advertising, everything would stop. We are told we have to listen to Hannity and every other corporate shill because they sell advertising and liberals don’t. Ad’s make the world go round.
Tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals, tax and spend liberals… (thank you Bob)
Why don’t you hear:
Spend and spend conservatives, spend and spend conservatives?
Because the media is one sided, and it ain’t liberal! Liberals aren’t cynical enough to mount a sound bite barrage to meet their political ends and prefer more complex discussions to plan our future. But repetition is powerful, so we find ourselves forced to use terms (yes soundbites) like pro-choice to counter the barrage. We have 24 hour news channels now, but can’t ever find the time for an uninterrupted discussion. Even William F. Buckley’s “Firing Line” offered a better forum then anything we have today because there were no ads. Before Ronald Reagan, PBS didn’t even have pledge drives. Yes, it’s true!
What about something more along the lines of “Paul Krugman’s Firing Line” without ads? Silly me.
Hannity tells you there is a “liberal media!” Every single decade, every single year, every single month, every single day.
Over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over…
You need us you need us you need us you need us you need us you need us you need us you need us you need us you need us you need us you need us you need us you need us you need us you need us buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy…
or surely, we must die!
In the end, it’s your fault if you fall for it, and that’s a bitch that will land you in debtors prison if the conservatives get their way!
March 7th, 2008 at 5:40 pm
One thing I have discovered is that marketers are as bad as lawyers when it comes to stretching the “truth”. They love to come up with terms that are subject to interpretation like “free” and “guarantee”. Consumers will take those terms literally, but the marketers will take the most restrictive definition imaginable. One question you should always ask is how much will this “free” item cost me?
March 7th, 2008 at 5:51 pm
It seems to me that credit reporting agencies are do for a massive class action lawsuit. They pour billions into politicians pockets from both parties, so don’t expect too much from government. A class action lawsuit might do the trick. They have the power to destroy lives and they are not held accountable when they make mistakes. I don’t know why this is not more of an issue. It effects everyone including those who religiously pay their bills on time.
With the rise of identity theft they must have a better mechanism to clean up erroneous information, but the credit agency’s automatic assumption is that anyone who challenges their credit report are doing so fraudulently. Yes that does happen, but if a credit reporting agency cannot prove the veracity of an item it should be taken away or at least flagged for further investigating. Companies should also be held accountable for not reporting pay-offs. They are quick to report negative information but slow at reporting the positive. It is a system that is broke but no one seems to care except for those victimized by it.
March 8th, 2008 at 7:34 am
Ken - The problem here is the one Robert Reich was talking about the other day in my post on banks - we need better regulation of banks and the financial industry. The credit reporting agencies (and there’s three of them and they each use a separate system and there’s no set rules) are arbitrary at best and generally capricious in their actions. What we need is better regulation, better enforcement and better standards. They often ignore payoffs for months even years and yet add negative information with joyous abandon.
And it gets even better - you have to pay to get credit monitoring to keep the problems from happening - problems that would not happen if the agencies were actually effective.
March 8th, 2008 at 11:13 am
Joseph Stiglets, Nobel prize winner for economics, has stated in his recent book “The Trillion $ War”, “Because of the war, the national debt is $2 Trillion dollars higher, at 5% interest that’s $100 Billion per year, year after year after year - forever!”
I want to thank all of the future generations for the loan. Of course, my credit rating has sunk into the fat-cats’ pocket, but what the hey?
This is not including any ‘bailouts’ to the subprime lenders and other corporate thieves that are presently coniving at the governmental troughs.
March 8th, 2008 at 1:48 pm
The future can be summed up in a few words.
Debt repudiation.
There is isn’t any real expectation we are going to pay.
The other option seems to be at hand…hyper inflation.
Those dollars in your hands? Spend them, they will just continue to become worth less. Why would something that is backed by nothing, based on a non productive economy accrue in value?
March 8th, 2008 at 3:54 pm
I’m not worried. I’m getting three hundred bucks in a couple of months!
March 8th, 2008 at 4:17 pm
4 into 300, wow, you can buy 75 gallons of gas, then we can motor around and save the economy while warming the Earth.
I figure it will get a 4WD maybe 1000 miles down the road. Nuts.
March 8th, 2008 at 4:48 pm
Glendon
I do agree that there needs to be more regulation, especially with credit bureaus and credit card companies which are the worst. One of the worst peices of legislation to ever come out of the Republican controlled Congress was the “Bankruptcy Reform Act” It should have been called the “Credit Card Company Carte Blanche Act” because it was written by them, and for them. I believe that our current banking crises is in part a result of that law and took the responsibility away from credit card companies. What it did is make card companies and mortgage companies willing to write riskier loans because there is less chance of the borrower filing for bankruptcy, and even if they do the new law requires payback in some fashion. It has made them much more aggressive and irresponsible. This law effects everyone, not just those who file for bankruptcy. The law sounded like a good idea to crack down on those abusing the system but with so many things it too follows the law of unintended consequences.
March 8th, 2008 at 6:10 pm
Jesus effin CHRIST. KEN IS A SOCIALIST!!!!
In case anyone missed it, “I do agree that there needs to be more regulation…“
March 8th, 2008 at 6:41 pm
It’s both a floor polish AND a foodstuff!
Better conserve on those exclamation points, Cliff., till we find out if you’re talkin about the same ‘regulations”.
March 8th, 2008 at 7:52 pm
Cliff
No I am not a socialist. In fact my reasoning is based squarely on conservatism. One of the great tenants of conservatism is that government should only be involved in things that are a common interest, and should not be in the business of favoring one group over another and that includes industries and individual business. The bankruptcy reform act was a case where the government passed a law favoring an industry over the interests of everyone else and therein is where the trouble started. The law gave an entire industry license to be irresponsible and just like I believe in personal responsibility, corporate responsibility is equally as important. When individuals act irresponsibly we have to create laws to regulate that activity in order to keep order. That is why a free people must also be responsible otherwise chaos ensues. The same can be said about an industry that has shown itself to be irresponsible, when that happens there is no alternative than to have the government step in to resume order even though it was a government action that helped cause the problem in the first place.
March 8th, 2008 at 9:00 pm
Who needs regulation when as People we can do what American Patriots did in 1775?
Flip off the crown and repudiate assumed debt. The crown wanted 10,000 pounds for its spilled tea. She “thought” she would get it. Oh yeah, she “Got it” alright. Followed the mud cart right to its source, the BOG.
It is time to do the Freedom walk, the time is over for silly talk.
September 2nd, 2008 at 6:11 am
Thanks for the informative post.. and thanks for adding our comment to the blog