An Open Letter To The Credit Industry

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Anyone who knows me knows that I am a huge proponent of the ideas that:

  1. Credit, when used properly can be a tremendous financial tool and
  2. People (and companies) would be best served to learn to take responsibility for their own actions and the resulting consequences.

That being said, I am a little tired of the consumers taking all of the heat for the mess that they are in.

Yes, I have said it myself that people need to be held accountable for where they end up, but at the same time, the companies that seduce them and make it too tempting for some of these people to resist getting in over their heads to “live the dream” need to bear some of the brunt of the backlash.

Not all of the blame mind you since everyone has the ability to make their own decisions of course, but both parties need to take responsibility.

The following is my line of questioning for the credit industry as I wonder where they come up with some of their practices.

Dear credit providers,

In light of the housing and credit crises of the past few years, I am left wondering about some of your practices in regard to the way you choose how to extend credit lines and how you deem certain applicants to be worthy of receiving a line of credit.

In the past, I have been a very big proponent of using credit as a financial tool, and of people taking responsibility for their financial situation, not blaming credit providers.

While I haven’t necessarily changed my views entirely, I have begun to question whether or not the credit industry deserves the support it has been receiving from not only myself, but others as well.

Seeing as there are so many homeowners in foreclosure proceedings or facing the inevitable event of being foreclosed upon, one has to wonder how you chose the recipients of the funds you lend and the mortgages you underwrite.

Did you not think that anyone who needed 100% percent financing or more–up to 125% in some instances as I have seen–was going to struggle keeping their loan repayments current, or even being able to make the payments at all?

How about those people who were so risky that they were required to accept double-digit interest rates in order to secure a loan while standard rates were no where near such figures?

And what about the potential home buyers whose mortgage payments figured to be more than half (or even a greater percentage) of their gross incomes, let alone home much of their net income it would consume considering net income is a much more accurate figure to use?

All of these situations were contributing factors to both the housing and credit problems facing the American public, yet seem to be almost entirely born out of short-term vision, with a blind eye toward the long-term effects of such deals.

I am also curious about how you go about choosing who you market your products and services to such as credit cards. Is it simply sending out pre-approval letters to anyone whose name appears on a purchased marketing list?

It’s pretty interesting how many people report receiving pre-approval letters in the names of children (particularly babies), family pets, and even the deceased!

I mean, really, do you verify any of the information you purchase from data collection firms say, by doing credit checks or some other verification method?

Perhaps if the focus were to shift from the quantity of pre-approvals you can send out to the quality of the recipients, the risk involved in extending credit to these people would be reduced significantly.

By shifting that focus, maybe, just maybe, you would be able to bring about a rebirth of credit as a beneficial tool rather than an abused and overused component of the financial landscape.

Speaking of credit cards, perhaps you can also enlighten me as to why it is that you would simply increase a card holder’s credit limit out of the blue.

Actually, how do you even come up with credit card limits to begin with?

Wouldn’t it make more sense to start cardholders off with a reasonably low credit line, thereby putting the onus on the card holder to prove their creditworthiness and make them ask  for an increase should the so desire?

I cannot even begin to recall the number of times I have read or heard about people in financial distress who said that they got deeper in the red because of the additional credit that was extended to them unrequested, and which they used simply because it was there.

Why not follow this strategy to avoid such further stories, and save yourself quite a bit of trouble all while leaving no one for the credit abusers to point fingers at other than themselves?

I mean, seriously, how are you going to get paid from people who don’t have the money to pay?

Even if you only expect to collect a fraction of the outstanding debts, a fraction of $0 (which is what many troubled people have) is still $0.

As I have stated, I am a staunch supporter of credit as a financial tool, but you are making it difficult to continually defend you from all of the detractors.

Most businesses find it beneficial to be consumer-friendly and provide value to their customers, but in recent years you have only shown a propensity for greed and disregard for the consumers.

All that has been displayed is an interest in increasing profits and padding your bottom line, no matter what the end result of your reckless actions may be or who gets stepped on in the process, as long as you benefit.

Hopefully, you have seen the error of our ways and are prepared to start putting the consumers first, considering that without people to borrow money, you would be out of business.

Thank you for your time and I hope you have learned a valuable lesson from all of this, as I know many individuals have.

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  1. It is disturbing the hundreds of billions of dollars in TARP funds that went to investment banks that were running operations to push loans to people that could not afford them and then turning around and securitizing them into CDS instruments.  S&P slapped a top rating on this junk and collected their fee, real estate agents sold houses to people they knew could not afford them, appraisers inflated appraisals so the buyer would qualify.   Now the bill is coming due and we all have to pay.  Sad thing is most people don’t understand how they were ripped off by Wallstreet and this will happen again in some form.

    Fall Team #4 Rocks!

    1. Personally, I think both sides are to blame, and I really hate when one tries to point the finger at the other. Sure, the lenders (and to a lesser degree the government) allowed these things to happen, but the consumer never had a gun to their head wither. Instead, they allowed themselves to be coaxed into a situation that would eventually blow up in their face, but I really believe that this was a result of both parties closing their eyes, diving in head first, and hoping to come up on the other side unscathed. Hopefully, people and businesses will be able to learn from this debacle going forward, but only time will tell.

    2. Eric,

      When I comment, I don’t normally just throw up a bunch of links. However, these two articles are very telling to both sides of the story.

      The first one is from Wired Magazine and does a great job explaining how bank diluted themselves into believing that they were not taking on risky loans. Banks even had math to back it up.

      The second is a study from the St. Louis Fed that shows that banks were not lending to high risk borrowers either, but educated people with high earning potential. The researchers argue that consumer over-reach was likely a driving cause to the meltdown.

      I feel like it confirms what we’ve all felt about the crisis, but they also dispell a lot of the mythology that pops up.

      Sorry for the essay with academic research attached, but I thought they fit in nicely with what you’d written.

    3. No worries Shaun. I don’t mind links if they back up what you’re trying to say. To be quite honest, while both of those articles provide excellent insight, they do the same thing many other people do: complicate things when it’s not really necessary. For whatever reason, people love to use technical terms and mathematical models in their writing. Maybe it makes them feel special or more intelligent. Maybe they just want to make others think they know what they are saying using such information. The problem is that most people need things explained in straightforward terms.

      In my eyes, and speaking on a level that would be understandable to all people, the lending industry took on too much risk by lending to too many less-than-desirable mortgagees and many consumers set themselves up for failure by signing mortgages that consumed too much of their disposable income. The consumers were even more irresponsible because they essentially ignored the effect of the ARM resets after their initial terms expired. Combined, these two factors led to the eventual housing crash. I know it’s a super-simplified view, but that’s basically what it all boils down to regardless of how many charts and figures people throw out there. I learned a long time ago, if you put things in simple terms, it’s easier for people to comprehend and right know, people need basic knowledge more than complicated formulas, terminology, and industry ramblings.

  2. Credit used responsibly is a good thing. When I was younger, I was not responsible with my money or credit cards, it was a very dark time financially.  But,with age comes wisdom and  even though we do have credit card debt presently, we have a plan in place to eliminate it.

    Go Fall Team #4!

    1. I think everyone needs to go through a little bit of a rough patch in order to truly understand the value of money and how to use credit properly. The people that give their kids everything and not make them work for it are by no means doing them any favors. We learn from our mistakes, it’s just the way life is. Hopefully you can stay away from more dark times!

  3. I honestly see no reason for the banks not to increase credit limits, when they see fit.  If they start a person off with a low limit and raise it after being shown the person pays on time I think it is ok.  That is how WF did it for me when I got my first student credit card.  They did not increase exponentially just a bit over time.

    1. I would agree if there wasn’t such a precedent for this kind of move. Look at it this way, if people really needed the extra credit they could simply call or go online and request it. That way, the lender can do their homework and see if the consumer is a good risk. By throwing increases at people for no apparent reason, they were just asking for trouble in my opinion. There may be a reason why someone is able to pay their bill in full and timely each month–most likely because the credit limit is within reason, but once the company gives the individual more and more credit, it may extend beyond what they can reasonably afford to use.

  4. No matter how hard I want to tell people, it’s pretty hard to understand that CC companies don’t want you to default and pay penalty. Perhaps I work for one of ’em so I know some data which others know. These companies make money in merchant fees alone. Your default fees do not contribute much in the bottom line, if anything it does, it is increasing risk if you default for one month. Believe me!

    And to grow their business they will have to get in to new markets new population. World of business is crazy and cruel it expects all to grow, if someone stops growing they get eliminated from the race.

    1. I agree SB. People don’t understand that the true income for credit card companies comes from the interchange fees and discounts they collect from the merchants. The interest and late penalty fees only go to recoup some of the money they lose when cardholders don’t pay their balances.

      That’s one of the things that the general population needs to do: learn how these things work before they use it or complain when they get themselves in trouble. Plus, people crying about the interest rates being so high is stupid to me because if they would pay for the money they borrowed on time, they would have to worry about it.