Thanks for this. Economic illiteracy is the norm, unfortunately. Government can sometimes helpfully set rules and impose regulations, but when they start interfering with pricing and supply bad things tend to happen.
Unfortunately, with all of the nonsense diverting the public's attention right now legislation like this (which can affect the lives and budgets of millions) get short shrift. Policies like these are an opportunity for politicians to launch a crusade and make a name for themselves... by destroying untold piles of wealth.
We need more content like this: direct, lucid, factual.
Unfortunately having credit, and building a good credit history, is necessary for many people to get access to home ownership. Building that history usually starts with cards. A new borrower is a risky borrower; there has to be a way for people to get that chance, then prove their creditworthiness over time.
You don't need a credit card the second you turn 18 to build credit.
You can get a credit card latter once you have a job and are not so risky anymore.
And even if the above 10 percent thing prevents older people from getting credit cards then banks would find some other way to validate who can get a mortgage.
And if less mortgages are approved then housing prices would come down which isn't such a bad thing.
But more to the point...the claim that "credit cards are good because they help people build credit scores" only is true for the people who are building a credit score. Obviously if it's so risky that they need to charge 18 percent that means not everyone is building up a good credit score.
So realistically there are 3 groups of people taking credit cards:
1. People who pay back the debt on time everytime and never accrue interest
2. People who don't pay anything ever (or at least much less than they owe)
3. People who end up paying back much more than 10 percent
For group 1 it's stupid to make policy for, because group 1 doesn't need or want credit and are just using it to game the credit rating system. If the goal is just to "find people who are good at keeping promises" you could just create a card that only gives 20$ of credit and people could take on that debt and pay it back. Besides people in group 1 are likely financialy smart and will do fine no matter what.
Group 2 and 3 are the people who are actually using credit for credit. They are both probably poor or desperate or not financially literate. And the group 3 people are the suckers because they could just not pay back anything and end up in group 2. Neither group will afford a house anyway.
So why are we creating a system that rewards people for good behavior of repaying their debts?
In my opinion we should have or allw debts that are virtualy unenforceable. It creates moral hazard and it's pointless.
People's lives are ruined by credit card debt. If people are so desperate that they need money right now then we need to solve that with a better social safety net for necessities.
But people use credit card debt for lots of things that are not necessaries.
Just like we legally restrict self destructive behaviors like not wearing seatbelts, gambelling, and drugs it's not crazy to also restrict people with terrible credit from taking out credit card debt.
I write mainly about US monetary policy, US fiscal policy, trade/industrial policy, and climate change policy.
I have my opinions about which US political party is by far the least bad and they are not hard to figure out, but I try to keep my analysis of the issues non-partisan.
Keynes said, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
Insurance is a bet with a bookie. You are betting something bad will happen. They are betting it won’t.
Every bookie must win 50% of the monetary value of their bets plus expenses plus a profit margin. If they don’t, rude strangers show up to put them out of business.
No sane bookie takes a bet on a race that has already run.
If you keep these things in mind, you will be neither surprised nor disappointed by insurance company behavior.
This reasoning is part of the problem. Insurance is not a bet and should not be likened to one. I would argue that the majority of our issues in the insurance market are driven by people having this misguided view of insurance.
Insurance is a service. You pay $X/month to shield yourself from risk Y, where Y is an event that would cause you great harm. You cannot afford for your house to burn down so you pay an affordable amount of money for someone else to take that risk for you. The money you pay each month pays for that month of the service and should not be viewed as some growing pile of cash you are owed in the future.
Lloyds of London, the _original_ insurance company, described their business in betting terms.
Insurance company actuaries compute the probability of a loss. Companies set their premiums accordingly. Unfriendly strangers shut them down when they lose money. What else can you call it?
You call it a risk transfer service because that's what it is. Your claim here is that because these two businesses are both related to probabilities then they must essentially be the same business. This is falacious for several reasons.
1. The probability math involved is fundamentally different. Sports betting is not a calculation of the probability of one team winning. The odds are set based on what is essentially an opinion poll and then presented to the customers as if they were probabilities. The accuracy of betting odds to the actual probability of team A winning are dependent on how well humans as a group can accurately guess the outcome. In casino games the probabilities are engineered into the game from the start. In both cases the house has a mathematical take rate built into the game. In insurance they are using probability and statistics to estimate risk and charge a fee. Thier calculations are not deterministic in the same way the probabilities on a 6 sided die are.
2. The fundamental purpose of these businesses is different. Betting is a purely money making endeavor for both the bookkeeper and the customer. Insurance is different. The best case scenario for a customer with house fire insurance is to never get paid a single penny from the insurance company. This is because the goal of the customer is not to make money, it is mitigate the catastrophic loss of thier home. The customer is willing to give the company money because if the house fire risk is realized their entire life is destroyed. They now owe a huge sum of money on a home that no longer exists and can't afford to rebuild it, leading to bankruptcy and likely not being able to buy a new home afterwards.
The difference in goals for the customer is key because it showcases why the betting analogy is so poor. If you approach insurance like a bookie you will forever be pissed and feel like you are being cheated. This is because insurance is not offering you a path to riches and the whole system is oriented towards risk transfer rather than paying out big wins.
The fact that you can liken things to bets at a high level does not mean everything in life is the same as betting on the horses. The fact that things have similarities does not negate the differences that distinguish them.
You say the differences i line out perceptual but the similarities you list are all esoteric comparisons to the concept of betting without acknowledging any differences.
Why would you need a high interest rate credit card at 20? There's zero reason for a 20 year old to go into debt at 30 percent interest unless they want to ruin their life as quickly as possible.
If the only purpose is building a credit history, they can get a secured card with a low limit.
Why did you NEED one? Were you making such massive purchases rewards somehow impacted your finances?
It sounds like it was just a risk that you were able to avoid by treating it like a debit card without any benefit other than the idea of having a credit card. Most people who are "responsible" with credit cards are never using any credit. They simply pay them off and they serve no purpose different than a debit card
Credit cards are totally unnecessary unless you make massive regular purchases for business reasons and need excess liquidity and are able to rack up rewards.
Most people with crappy credit can't get cards with good rewards anyway.
Again, building credit history as a young person can be done with a secured credit card.
High interest rate cards serve no purpose other than banks exploiting the poor and financially irresponsible
It's perfectly possible to build a credit history and access credit without engaging with usury. I bought a house before I even had a credit card.
At the time it was simpler to purchase flights with a credit card. And my income was steady but low and the ability to spend before I had to pay was of benefit to me.
Secured credit cards didn’t and don’t exist where I live. Nor is credit scoring a thing.
America is not the center of the universe, but this article is about proposed legislation in the US, on credit card companies in the US. Which would be a good thing, because the US has secured credit cards, and most institutions heavily rely on credit scores.
The argument that a 20 year old needs access to an unsecured, high interest rate credit card doesn't apply here, and is almost always more risk than it's worth. Banning usurious interest rates on credit cards only harms banks seeking to exploit people.
A good point, I suppose, but can you tell me if the fees they so earn will be sufficient to offset the likely reduced volume of activity in such a fundamentally altered business case? In a world where some will then say, why not a 5% cap? Why not 1%? And why not cap transaction fees? If it is all about what government power can do to benefit you at someone else’s expense, why not demand free credit?
If you have a stable income It doesn’t matter what the interest rate is if you use the card to pay for daily expenses and always (I mean always) pay the full monthly due every single month (and I mean every single month). That’s just convenience. If rates are capped I fear this “convenience” use case will disappear with the credit card issuer loss of profit from people who don’t do this, because 10% will never be enough to justify their risk on loans to people who can’t do this.
What’s the problem if people can’t get credit cards because the risk is too great for 10% interest? It seems odd you’d support the accumulation of debt and debt slavery of the poor.
As I commented elsewhere, the ability to gain credit is (unfortunately or not) essential for most people. Wanting to own a house is not “debt slavery”, but you’ll struggle to get a mortgage with no credit history. Everyone is a risky borrower at age 18, there has to be an on ramp to building a good credit history, and that’s typically starting with a credit card.
You don’t need to start building your credit history with an unsecured card. There are many alternatives including secured cards, low credit limits, and annual fees. No one needs to or should at all start with a 30% interest rate credit card. No financial beginner should have access to that!
Well constructed, but there are a few gaps. Predatory lending is a fact; loan sharks exist, they aren’t a fiction. By controlling usury, you reduce the risk of people falling into untenable loans. Once bankruptcy is absorbed, everyone has to pay for the remediation because all interest rates rise fractionally “the house always wins”.
The credit “at all” controls are the other variable, from no cars to low limit credit. It’s not that nobody can get a card at 10%, it’s that the credit line isn’t $10,000.
On insurance markets, I think that caps are valuable, because it forces a reckoning that protections of houses knowingly built on quicksand shouldn’t be paid for through insurance costs spread to everyone.
Building a house on terrain which floods every year when it doesn’t burn down to the ground - is that the responsibility of the spread risk to cover?
I write mainly about US monetary policy, US fiscal policy, trade/industrial policy, and climate change policy.
I have my opinions about which US political party is by far the least bad and they are not hard to figure out, but I try to keep my analysis of the issues non-partisan.
Keynes said, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
"a lot more people not getting credit cards at all"
This is a GOOD THING. People who can only get cards at obscene interest rates don't benefit from them, they ruin their lives with them. The only reason to allow usury at that level is to allow bankers to benefit from financially irresponsible people. I see no benefit to anyone except bankers.
And yet opportunity knocks when one insurance company stops writing policies in a geographic area. Other firms with distributed books of business write the policies.
For the credit card scenario, two things: Card companies have gotten greedy and their rates reflect a degree of avarice unjustified by perceived risk. Whether the foolhardy or prudrnt, one is dinged %BIG for a missed payment.
Option: Secured cards for higher risk individuals.
Pseudo economic literacy is dangerous too! Comparing home insurance to credit cards tells me that you have no clue over the risk-reward trade offs for different financial instruments. I would not trust a handyman who doesn’t know the difference between a screw driver and a jack hammer.
This is a great post. It’s sad to think that people don’t understand this; it’s sad that our idiot education system doesn’t teach this in every grade level, during every year of education, with age-appropriate levels of detail that is generally designed to raise economic awareness throughout.
Luna is reasonably attractive, but even if AOC was based, I'd still think she was bug-eyed and horse-faced and continued to bewildered by all the simping that goes on for her.
Thanks for this. Economic illiteracy is the norm, unfortunately. Government can sometimes helpfully set rules and impose regulations, but when they start interfering with pricing and supply bad things tend to happen.
Unfortunately, with all of the nonsense diverting the public's attention right now legislation like this (which can affect the lives and budgets of millions) get short shrift. Policies like these are an opportunity for politicians to launch a crusade and make a name for themselves... by destroying untold piles of wealth.
We need more content like this: direct, lucid, factual.
https://jmpolemic.substack.com/p/silence-as-a-political-strategy
Why is it 'insane' that people who shouldn't be having credit cards can't get them ?
House insurance is a need. A credit card isn't.
Unfortunately having credit, and building a good credit history, is necessary for many people to get access to home ownership. Building that history usually starts with cards. A new borrower is a risky borrower; there has to be a way for people to get that chance, then prove their creditworthiness over time.
You don't need a credit card the second you turn 18 to build credit.
You can get a credit card latter once you have a job and are not so risky anymore.
And even if the above 10 percent thing prevents older people from getting credit cards then banks would find some other way to validate who can get a mortgage.
And if less mortgages are approved then housing prices would come down which isn't such a bad thing.
But more to the point...the claim that "credit cards are good because they help people build credit scores" only is true for the people who are building a credit score. Obviously if it's so risky that they need to charge 18 percent that means not everyone is building up a good credit score.
So realistically there are 3 groups of people taking credit cards:
1. People who pay back the debt on time everytime and never accrue interest
2. People who don't pay anything ever (or at least much less than they owe)
3. People who end up paying back much more than 10 percent
For group 1 it's stupid to make policy for, because group 1 doesn't need or want credit and are just using it to game the credit rating system. If the goal is just to "find people who are good at keeping promises" you could just create a card that only gives 20$ of credit and people could take on that debt and pay it back. Besides people in group 1 are likely financialy smart and will do fine no matter what.
Group 2 and 3 are the people who are actually using credit for credit. They are both probably poor or desperate or not financially literate. And the group 3 people are the suckers because they could just not pay back anything and end up in group 2. Neither group will afford a house anyway.
So why are we creating a system that rewards people for good behavior of repaying their debts?
In my opinion we should have or allw debts that are virtualy unenforceable. It creates moral hazard and it's pointless.
People's lives are ruined by credit card debt. If people are so desperate that they need money right now then we need to solve that with a better social safety net for necessities.
But people use credit card debt for lots of things that are not necessaries.
Just like we legally restrict self destructive behaviors like not wearing seatbelts, gambelling, and drugs it's not crazy to also restrict people with terrible credit from taking out credit card debt.
Do you mean “gamboling”, like a young lamb frolicking in a field? That’s not risky behavior; that joie de vivre. Anyway, you seem like a killjoy.
Edit above should be "rewards for bad behavior and not paying debts" substack is not letting me edit the comment
Hi
As you are not already a subscriber, may I invite you to subscribe (for free) to my substack, "Radical Centrist?"
https://thomaslhutcheson.substack.com/
I write mainly about US monetary policy, US fiscal policy, trade/industrial policy, and climate change policy.
I have my opinions about which US political party is by far the least bad and they are not hard to figure out, but I try to keep my analysis of the issues non-partisan.
Keynes said, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
I want to be that scribbler.
Thanks,
What about those credit builder cards? Do they rely on high interest rates?
Yes
No, they rely on annual fees or putting down deposits
Correct!
Insurance is a bet with a bookie. You are betting something bad will happen. They are betting it won’t.
Every bookie must win 50% of the monetary value of their bets plus expenses plus a profit margin. If they don’t, rude strangers show up to put them out of business.
No sane bookie takes a bet on a race that has already run.
If you keep these things in mind, you will be neither surprised nor disappointed by insurance company behavior.
This reasoning is part of the problem. Insurance is not a bet and should not be likened to one. I would argue that the majority of our issues in the insurance market are driven by people having this misguided view of insurance.
Insurance is a service. You pay $X/month to shield yourself from risk Y, where Y is an event that would cause you great harm. You cannot afford for your house to burn down so you pay an affordable amount of money for someone else to take that risk for you. The money you pay each month pays for that month of the service and should not be viewed as some growing pile of cash you are owed in the future.
Lloyds of London, the _original_ insurance company, described their business in betting terms.
Insurance company actuaries compute the probability of a loss. Companies set their premiums accordingly. Unfriendly strangers shut them down when they lose money. What else can you call it?
Asserting something doesn’t make it so.
You call it a risk transfer service because that's what it is. Your claim here is that because these two businesses are both related to probabilities then they must essentially be the same business. This is falacious for several reasons.
1. The probability math involved is fundamentally different. Sports betting is not a calculation of the probability of one team winning. The odds are set based on what is essentially an opinion poll and then presented to the customers as if they were probabilities. The accuracy of betting odds to the actual probability of team A winning are dependent on how well humans as a group can accurately guess the outcome. In casino games the probabilities are engineered into the game from the start. In both cases the house has a mathematical take rate built into the game. In insurance they are using probability and statistics to estimate risk and charge a fee. Thier calculations are not deterministic in the same way the probabilities on a 6 sided die are.
2. The fundamental purpose of these businesses is different. Betting is a purely money making endeavor for both the bookkeeper and the customer. Insurance is different. The best case scenario for a customer with house fire insurance is to never get paid a single penny from the insurance company. This is because the goal of the customer is not to make money, it is mitigate the catastrophic loss of thier home. The customer is willing to give the company money because if the house fire risk is realized their entire life is destroyed. They now owe a huge sum of money on a home that no longer exists and can't afford to rebuild it, leading to bankruptcy and likely not being able to buy a new home afterwards.
The difference in goals for the customer is key because it showcases why the betting analogy is so poor. If you approach insurance like a bookie you will forever be pissed and feel like you are being cheated. This is because insurance is not offering you a path to riches and the whole system is oriented towards risk transfer rather than paying out big wins.
Thank you for your reply.
The differences you cite are mostly perceptual.
Sports bookies attempt to nail down their uncertainties with statistics in much the same way that actuaries do.
Both customers and companies do have a common interest in risk reduction.
Insurance is a side bet to hedge the downside of losing one of the bets that is life.
The fact that you can liken things to bets at a high level does not mean everything in life is the same as betting on the horses. The fact that things have similarities does not negate the differences that distinguish them.
You say the differences i line out perceptual but the similarities you list are all esoteric comparisons to the concept of betting without acknowledging any differences.
Who are you to decide who should or shouldnt have credit cards?
A credit card company?
I tip my hat to you
Even payday lenders have a place. A sky high interest rate is worth it if it’s only for a few days and you get your car fixed so you can get to work.
Well explained!
In my 40s now with a decent income and perfect credit record I would probably get a credit card if rates were capped at 10%.
But no one would give a credit card at 10% to the 20-year old me who had a patchy income and no credit record.
Why would you need a high interest rate credit card at 20? There's zero reason for a 20 year old to go into debt at 30 percent interest unless they want to ruin their life as quickly as possible.
If the only purpose is building a credit history, they can get a secured card with a low limit.
At the age of 21 I had a credit card with 20 something percent interest.
I’ve always been broadly speaking responsible with money and was well able to handle the discipline of a credit card.
Why did you NEED one? Were you making such massive purchases rewards somehow impacted your finances?
It sounds like it was just a risk that you were able to avoid by treating it like a debit card without any benefit other than the idea of having a credit card. Most people who are "responsible" with credit cards are never using any credit. They simply pay them off and they serve no purpose different than a debit card
Credit cards are totally unnecessary unless you make massive regular purchases for business reasons and need excess liquidity and are able to rack up rewards.
Most people with crappy credit can't get cards with good rewards anyway.
Again, building credit history as a young person can be done with a secured credit card.
High interest rate cards serve no purpose other than banks exploiting the poor and financially irresponsible
It's perfectly possible to build a credit history and access credit without engaging with usury. I bought a house before I even had a credit card.
At the time it was simpler to purchase flights with a credit card. And my income was steady but low and the ability to spend before I had to pay was of benefit to me.
Secured credit cards didn’t and don’t exist where I live. Nor is credit scoring a thing.
America is not the centre of the universe.
America is not the center of the universe, but this article is about proposed legislation in the US, on credit card companies in the US. Which would be a good thing, because the US has secured credit cards, and most institutions heavily rely on credit scores.
The argument that a 20 year old needs access to an unsecured, high interest rate credit card doesn't apply here, and is almost always more risk than it's worth. Banning usurious interest rates on credit cards only harms banks seeking to exploit people.
A good point, I suppose, but can you tell me if the fees they so earn will be sufficient to offset the likely reduced volume of activity in such a fundamentally altered business case? In a world where some will then say, why not a 5% cap? Why not 1%? And why not cap transaction fees? If it is all about what government power can do to benefit you at someone else’s expense, why not demand free credit?
So, I agree, transaction costs are a bitch.
In Europe transactions fees (specifically interchange fees) are capped at 0.15%.
It means no rewards club or air miles that Americans are used to.
It tends to mean people only have one credit card which is not a bad thing.
If you have a stable income It doesn’t matter what the interest rate is if you use the card to pay for daily expenses and always (I mean always) pay the full monthly due every single month (and I mean every single month). That’s just convenience. If rates are capped I fear this “convenience” use case will disappear with the credit card issuer loss of profit from people who don’t do this, because 10% will never be enough to justify their risk on loans to people who can’t do this.
I don’t think so. Card issuers also profit from fees that merchants charge. It can be 40% of their earnings.
The lower the capped interest rate the more the lender will restrict it to a very good credit risk like me.
What’s the problem if people can’t get credit cards because the risk is too great for 10% interest? It seems odd you’d support the accumulation of debt and debt slavery of the poor.
As I commented elsewhere, the ability to gain credit is (unfortunately or not) essential for most people. Wanting to own a house is not “debt slavery”, but you’ll struggle to get a mortgage with no credit history. Everyone is a risky borrower at age 18, there has to be an on ramp to building a good credit history, and that’s typically starting with a credit card.
You don’t need to start building your credit history with an unsecured card. There are many alternatives including secured cards, low credit limits, and annual fees. No one needs to or should at all start with a 30% interest rate credit card. No financial beginner should have access to that!
High interest credit cards are not a requirement for building credit history.
Why do you assune these people not having access to credit is a bad thing?
I would guess that most people who take out credit card debt of 18% would be better off if they didn't have the ability to do that at all.
Well constructed, but there are a few gaps. Predatory lending is a fact; loan sharks exist, they aren’t a fiction. By controlling usury, you reduce the risk of people falling into untenable loans. Once bankruptcy is absorbed, everyone has to pay for the remediation because all interest rates rise fractionally “the house always wins”.
The credit “at all” controls are the other variable, from no cars to low limit credit. It’s not that nobody can get a card at 10%, it’s that the credit line isn’t $10,000.
On insurance markets, I think that caps are valuable, because it forces a reckoning that protections of houses knowingly built on quicksand shouldn’t be paid for through insurance costs spread to everyone.
Building a house on terrain which floods every year when it doesn’t burn down to the ground - is that the responsibility of the spread risk to cover?
Hi
As you are not already a subscriber, (I'm a new subscriber to yours) may I invite you to subscribe (for free) to my substack, "Radical Centrist?"
https://thomaslhutcheson.substack.com/
I write mainly about US monetary policy, US fiscal policy, trade/industrial policy, and climate change policy.
I have my opinions about which US political party is by far the least bad and they are not hard to figure out, but I try to keep my analysis of the issues non-partisan.
Keynes said, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
I want to be that scribbler.
Thanks,
Surprised AOC can understand percentages. She goes by her initials, after all.
"a lot more people not getting credit cards at all"
This is a GOOD THING. People who can only get cards at obscene interest rates don't benefit from them, they ruin their lives with them. The only reason to allow usury at that level is to allow bankers to benefit from financially irresponsible people. I see no benefit to anyone except bankers.
And yet opportunity knocks when one insurance company stops writing policies in a geographic area. Other firms with distributed books of business write the policies.
For the credit card scenario, two things: Card companies have gotten greedy and their rates reflect a degree of avarice unjustified by perceived risk. Whether the foolhardy or prudrnt, one is dinged %BIG for a missed payment.
Option: Secured cards for higher risk individuals.
Pseudo economic literacy is dangerous too! Comparing home insurance to credit cards tells me that you have no clue over the risk-reward trade offs for different financial instruments. I would not trust a handyman who doesn’t know the difference between a screw driver and a jack hammer.
This is a great post. It’s sad to think that people don’t understand this; it’s sad that our idiot education system doesn’t teach this in every grade level, during every year of education, with age-appropriate levels of detail that is generally designed to raise economic awareness throughout.
Occasional-Cortex is always a supporter of insane economic ideas. Too bad the US doesn’t have an NDP: she’d fit right in.
It’s called usury, and has led to the downfall of many forms of government and banking systems and not in good ways.
I think it’s important to point out that they’re pretty.
Luna is reasonably attractive, but even if AOC was based, I'd still think she was bug-eyed and horse-faced and continued to bewildered by all the simping that goes on for her.
“Bug eyed and horse faced” — there’s a country song in there somewhere.