The Psychology of Credit Cards

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I don't have much of a comment to make here, but I wanted to link to a fascinating NY Times article I read about how credit card companies analyze purchase patterns and the psychology of individuals to determine who is a good credit risk and who is a bad credit risk, and how best to get their money back from people who do fall behind on their payments.

One of the more interesting aspects is a credit card company knows a lot more about you than you think they do, and they get a lot of information just based on what you buy, how frequently and at what time you log onto your online account, and a host of other factors.

To use one example in the article, they have discovered that people who buy those little coaster things to put under their furniture so that the furniture won't damage their carpets or hardwood floors tend to be very good credit risks. These people tend to be very protective of all their belongings - including their credit scores - and usually pay off their entire balances every month.

Anyway, I just thought it was a very interesting read. Here's the article.

 

That guy talked about his ex the way I wanted to, but of course never did -- I already knew that creditors didn't care about my marriage's dissolution -- I ended up going bankrupt. And people wonder why I'm bitter.

That said, to me credit cards are like a deal with the devil. If you manage to pay your entire bill every month, you are ok and they can't mess with you. But if you make but one tiny little mistake, they swoop into your life and <snip> you over for years to come. The fact that they structure it so that it is next to impossible to avoid a mistake, and it's a bad deal. I have lived without credit cards for about 5 years now, and it is a pain but at least I am free! They know entirely too much about their customers and I don't like people fiddling around inside my head.

 

While getting another 2 grand out of him.

Not that I am against defaulting on payments or anything, just the way he talks about wheedling out as much money as he can as if he is saving the man bothered me.


It was an interesting article, but doesn't give me much hope for when I get out of college and probably have to get a credit card that I pay for on my own.

Do the same situations with fees and such apply to debit cards? Because for those, they access the cash you already have...

 

There has been a lot of flak fired away at the Lenders in the last few years. I have found it quite amusing. If you can't afford it, don't buy it. If you need credit to buy it, you need to adjust your spending habits. Chuck the cell phone, high-speed internet, cable/satelite and any other wasteful expense that you really don't need to get by out the window for a few months and save money. No one is willing to be responsible these days. If I owned or ran a lending business, I would use every angle I could to figure your spending habits out as well. Why not try to judge who you are lending to when you are the one at risk when they default? Getting credit is not a right that is gauranteed to everyone, it's a privilege which you nned to qualify for. There's a difference. Be responsible, manage your money and pay your bills. It's really that simple people. There are so many that think they should be able get approved for anything they want to buy, as was the case with so many with homes that were foreclosed because the owner couldn't handle the payment. Morons!

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A plain old Debit card is attached to your account, it's not credit. Overdraft is another issue, but again, that's on the card-holder, not the lender. If you can't keep track of your own money and what you spend, you're an idiot.(Not you Saber, just in general)

 

Well, the guy did owe almost $30K. He did save the guy quite a bit of money, even if he did get another $2K out of him. I mean, he spent the money. Technically, he didn't have to cut him any kind of break.

 

There is an obvious imbalance of power between credit card company and lender. It is also a seductive relationship. In many ways credit cards are indispensable. It is probably very difficult today to get by without a bank account and at least a bank card or a credit card. From what I read, that is even more so in the US where credit cards are necessary for many purchases and services.

Credit card companies offers incentives for credit card use, and while there is obviously personal responsibility, the company's contribution to card holders overspending is a factor that cannot be ignored. After all, with the interest and the fees they charge they feast off the reckless customers, and they have been specifically targeting such customers (and raking in profits). It is thus a little myopic to focus blame on irresponsible individuals and leave it at that.

In addition to that, a lot of the practices common in the US, in particular variable (i.e. reactive) interest rates can essentially amount to a one-sided change of contract and are thus considered illegal in Germany, and iirc the entire EU (i.e. the idea of a contract generally being that contracts are a mutual agreement). Binding customers into arbitration likewise would probably be illegal as people have a right to the enforcement of their rights in court.

Variable interest rates are unfair. Fixed interest rates in a credit (card) contract allow a customer to assess whether he will be able to pay his debt, and to predict how the debt will develop. In the US companies can, and often do, sometimes substantially, raise interest rates if a customer defaults. They can do that basically at any given time during the credit card contract. A customer who, say, loses his job, has a big medical bill to pay and defaults on his credit card bills will likely face a hike in interest, rendering all his previous assessments moot as he is now in a very different position. Something like 15% instead of 7,5% interest make a big difference, and can quickly turn a moderate debt into a big one. Such interest rate hikes are a thing the customer could not have foreseen when he agreed into the credit card contract; assuming otherwise assumes that customers who default on their bills enter into credit card contracts recklessly and basically with intent to defraud. I do not think that is representative of the average credit card debtor.

 

Oh, you're being way to generous here Ragusa. Many credit cards have 15% or more interest just as the standard. I know people who have missed a payment that have seen their interest rate go to 30%.

 

I believe the days of the lenders raising your rates at will are over and I don't blame the backhanded raising of rates on the card-holders, that is solely on the lenders and was absolutely wrong. But when you the consumer sign-up for credit knowing your rates are variable and subject to change and still spend beyond your means and don't allow for the variable change, that is wholly the fault of the card-holder. Ignoring that fact and crying foul afterward is ridiculous. This is the case of a large % of people who are now wallowing in money troubles. Crying about it after the fact just shows their lack of responsibility. There are too many fools out there that will sign anything without reading the terms. It's commonplace these days.

As for needing credit for many services and purchases in the US, that is absurd Rags. You can pay by cash, check or Debit for all of your essential needs. Credit isn't necessary. It is a luxury that is abused.

Now for purchasing a home or new vehicle(which is never necessary when you can buy a used vehicle that runs fine for much cheaper, the car only needs to get you from point A to B, it doesn't need all of the "upgrades"), obviously a credit line is needed, but those fools who walk in and just sign w/out even trying to understand what they are getting into or those squatters that have no intention of ever paying against the loan are the ones that are in the wrong. The lenders are a business that provide a service. That service comes at a price. I admit, it should be a reasonable price, but if you agree to an unreasonable one, that is on you. I say, get off your lazy-ass and do some research and earn yourself a better deal.

 

Great article, thanks for posting it. I would love to see the psychological report based on my spending habits.

 

Blades, to get some things you need to give them a credit card number, IIRC. I don't think that you can rent a car or reserve a room without one. now I agree that in most cases those things are luxuries, but sometimes they are not -- average day to day life is awkward as heck when you don't have a card. But I do manage to get by, albeit painfully.

If the card companies just offered a card and charged a high interest rate, I wouldn't have as much trouble with them. The problem is that they encourage and promote overspending, hoping to generate a cash cow that they'll be rolling in for the next several decades. Such trickery is despicable.

 

I think you are fine with a debit card as long as it is tied to one of the major providers. I have a VISA card but I have zero credit on it and I can use it all over the world, on the internet and rent cars. I just cant spend more money than I have, well I can due to the lag but then VISA would be angry and not any great amounts.

 

I know at least two airlines requiring credit cards to book flights, if you want to book early and cheaply and not go to the airport hoping to get a seat (without any guarantee of success) and also pay the full fare.

 

It was fascinating to read. I don't think a lot of it applies here, the whole area of credit rating is a lot less developed than the US. I'm not sure how mine would look. I have a credit card but it's set up so that my bank automatically transfers the money to pay the full amount each month. I generally only use it for those situations where I need to, like over the phone or the internet. The last thing I needed it for was my chartered accountants society fee, which I'm guessing should be a good risk. Aside from that it'a a load of music and games, which probably aren't so good.

I did go through a phase with the bank of having them constantly ringing me up to get me to switch to a card with a lower rate. It was quite annoying. I couldn't care what the rate is seeing as how I don't pay interest.

 

Ragusa, which ones? I am curious because up to now my VISA debit card has worked exactly like a credit card and been accepted everywhere. I am interested to know if should open up some credit on it for travelling or if it will continue to work everywhere I go just as a debit card.

 

For all practical purposes, a debit card IS a credit card. They are issued by the major lenders, and as joacquin points out, any place that takes a VISA credit card will accept a VISA debit card. I cannot imagine that you wouldn't be able to rent a car, or purchase a plane ticket with a debit card.

The only major difference between a credit and a debit card is with a credit card you have a hard, pre-set limit as to how much you can charge to it. OTOH, with a debit card, you have a variable limit, equal to the amount of money that happens to be in the account that is tied to it. If you pay your balance in full each month, there is really no difference between a debit and credit card.

That said, while not a necessity, some things would be pretty damn inconvenient if you didn't have a credit card OR a debit card. Reserving hotel rooms, booking flights, renting cars are just a few examples. Sure, like Ragusa said, you could pay for these things with cash on the spot, but generally you pay more, and without reserving one ahead of time, there's no guarantee that you are going to get one when you show up.

I view having a credit card as the equivalent of having a computer - while not a necessity of life, it makes things a lot easier if you have one.

EDIT: One of the things I found incredible about the article was the statistic that said one year over 10 billion credit card applications went out, which is more applications than there are people in the world. Sure, many people have more than one credit card, but when you consider that a good chunk of the world's population consists of children too young to get a credit card, or people in such poverty stricken areas that no one in the entire community has a credit card, it pretty much got to the point that you had to apply to NOT get a credit card.

 

Having credit has lead to an entitlement problem. People realize on some level that buying a dwelling, a car (or several) and a posh home entertainment system along with a computer for internet pr0n is about half a life's worth of savings alone (give or take). But they still want more, and having credit is all too convenient way to hide that fact until you finally notice you're in debt up to your ears.

I guess having had a mom that works in an actual bank has done its thing, but I fail to realize why on earth I'd take credit for anything less than a house or maybe a car. Anything else I should be able to save for in advance, and that ensures the effective buy price is kept low so I can buy more in the long run. Compared to someone that pays for the stuff AND a whole lot of interest on top of it as well, at least.

 

Your right Aldeth, when that is said for those with financial stability. But those who have been in financial ruin or are just getting by on what they currently make, don't need to rent rooms, rent cars, go out to expensive restaurants, etc... That's my point. When your getting close to your limits, you need to backoff on your spending. Too many out there don't.

 

Joa,
I think Aldeth spotted the misunderstanding. The airlines I have in mind (Germanwings, Ryanair) accept cards from VISA, Master etc. - i.e. it doesn't matter of it's debit or credit card as long as it is a VISA, Master etc. - but not the plastic from my local bank.

BoV,
sometimes you don't have a choice but to use a credit card, and it has simply to do with saving money. When you have to fly (say, for a job interview, or a family visit or a friend's wedding) you will fly cheaper (we talk of things like a two way flight Cologne-Munich for € 50 instead of up to € 250) if you book early and online, which is only possible with a credit card. If you're on a tight budget only that make it possible for you to fly.

Another example, albeit a luxury purchase: I use my credit card card, among other things, to buy my computer games at Amazon.co.uk. There is no other way for me to pay there. Games in the UK cost less than in Germany, shipping included, and I'll even get an untranslated original. I get them flown in, usually even get them earlier than in Germany - and still pay about 30% less. Absurd, but true.

That is, credit cards can also help you live better within your means. Aldeth is quite right, they're a valuable and convenient tool.

 

Rags,

I'm not promoting their dissolution. Just the education of using them. I use my Visa, for plane tickets, but it is a Debit Visa. The credit is not needed. Same for car rentals when I travel from Illinois to Pennsylvania and New York. I have Credit Cards, but I only use them sparingly. Not because I need to use them, but to help keep my credit rating up. I always pay them off immeditately when doing so. My wife OTOH would use them liberally a few years ago. I corrected that practice. I would probably own my home right now if she didn't do that.

 

Credit cards are the best if you have the financial ability and discipline to properly use them. If you don't they can lead to financial ruin. We can go weeks without having to go to an ATM as we put almost everything on the cards. Depending on which card we use (we use 3) we get different benefits depending on the card. We never pay a penny in interest as when the bill comes in, we pay it in full. The convenience of using the plastic is another benefit.