Preposterously small minimum payment

[Anonymous]

Frontline (the PBS show) did an episode called the secret history of the credit card. You can google it.

In the course of the episode they interviewed Andrew Kahr the credit card industry consultant responsible for many marketing and product changes in the credit card industry since the early 1990s.

He was interviewed under the conditions that his client list would not be revealed and that his current location would not be revealed (town/State).

Prior to his involvement the Minimum payment used to be a self set industry standard of 5% of the balance.

Kahr came up with the idea to drop it to 2% as it would:

• increase the amount of transactions people would charge as 5% of $3000 was a $150 a month payment where 2% was a 60.00.
• increase the length of time people would keep balances and willingness to churn therefore increasing interest income
• increase the amount of time it wold take people to pay them.

Once the companies he consulted to switched to this, others followed suit as they were losing business to these more "consumer friendly" terms 

[MattH]

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@Anonymous wrote:

Frontline (the PBS show) did an episode called the secret history of the credit card. You can google it.

In the course of the episode they interviewed Andrew Kahr the credit card industry consultant responsible for many marketing and product changes in the credit card industry since the early 1990s.

He was interviewed under the conditions that his client list would not be revealed and that his current location would not be revealed (town/State).

Prior to his involvement the Minimum payment used to be a self set industry standard of 5% of the balance.

Kahr came up with the idea to drop it to 2% as it would:

• increase the amount of transactions people would charge as 5% of $3000 was a $150 a month payment where 2% was a 60.00.
• increase the length of time people would keep balances and willingness to churn therefore increasing interest income
• increase the amount of time it wold take people to pay them.

Once the companies he consulted to switched to this, others followed suit as they were losing business to these more "consumer friendly" terms 

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Here is a transcript of that Frontline episode WGBH

The decision to lower the minimum payment indeed had a dramatic impact in altering consumer psychology, and also allowing credit limits to become much much higher.  But my favorite quote in this piece comes a little after the Andrew Kahr interview:

Prof. ELIZABETH WARREN: I've read my credit card agreement, and I can't figure out the terms. I teach contract law, and the underlying premise of contract law is that the two parties to the contract understand what the terms are

Incidentally, according to Wikipedia "Andrew Seth Kahr was the founder and CEO of First Deposit Corp, which later became known as Providian, and was acquired by Washington Mutual in 2005," which Frontline was not allowed to mention.  Kahr got a Ph.D. in Mathematics at MIT in 1962.

Those interested in the history of credit also should know about the Supreme Court case: MARQUETTE NAT. BANK v. FIRST OF OMAHA CORP, the 1978 decision that basically eviscerated State usury limits on interest rates and thus made the subprime credit boom possible.  The Court ruled that a State could not enforce its usury law against out-of-State companies lending to its residents.  As a result, nearly all national credit card companies moved to States without usury limits, thus evading the limits most States impose on interest rates.  Before this case, most credit card companies were quite strict about whom they would accept as customers because there were limits on their ability to raise rates on many of their customers.

Message Edited by MattH on 02-24-2009 07:17 AM

[Uborrow-Upay]

Excellent post, MattH!  Especially poignant in light of the new CC rules to take effect in 2010, which explains why the credit card companies are protecting themselves by rate-jacking their customers now...

[MattH]

I think a core premise in much credit marketing is many people tend to assume their financial situations will be much better at some future date than they are right now, so they pay more attention to how much they have to pay up front than to the actual total cost of a purchase.

[Watchmann]

Unfortunately we have become a nation of Payment Minimizers rather than Wealth Maximizers.  Prior to about 10 years ago people would look at what the TOTAL cost of a house, car, and other items were going to cost and plan accordingly.  And they used cash or checks.  Then they started looking at how much the MONTHLY COST of their life style would be, losing focus on what their lifestyle was really costing.  A good example is car leasing, surely the most expensive way for non-business people to operate a vehicle, yet people became enamored with the monthly payment and not the total cost.  I don't see how the credit industry is responsible for this.  We should have been buying average Toyotas, Fords, or Chevrolets and not perpetually renting BMWs or Lexuses.  That was our choice.

Most threads here always seem to blame the credit industry for the posters problems, complaining about CLD's or rate jacks.  No one force fed credit to any of us, we all engorged in credit by our own free will.  People need to stop scapegoating the industry and get on with paying down their debt.  Revolving it or transferring it from one card to another is NOT managing your financial life.  Those days are over.  You have to get rid of it by liquidating it.  Unfortunately we are going down the road of instead of paying it off through working harder or tapping savings, we are now more willing to default or, worse, expect the government to bail us out.  That is like the drug addict blaming the pusher for his problems.  The dealer enabled the addict and should be disciplined, but the ultimate responsibility lies with the user.    

Message Edited by Watchmann on 02-24-2009 09:07 AM

[specultr]

x

[Anonymous]

Most creditors charge 1% of the balance plus the interest charges from the previous month.  I think people forget this is called the MINIMUM PAYMENT,and what the words mean.  It is just a number to meet a requirement to pay that month and report current.  I don't think I've ever seen a note on my CC statement saying "Please just pay the minimum and nothing else" Perhaps we need to remember that credit card companies don't charge early payment penalties.  People should plan on what their balance is and how fast they want to pay it off and not overspend.  I just think that some people have not been financially responsible and choose to blame credit card companies.  People overspend to the point they can barely make minimum payments.  It's like a drug addict blaming their dealer.  I've been there and done that...and I think people on here already know it's a bad thing to do...but I still don't understand people who lay the blame on CC companies....I knew what I was doing...

I think there would be more outrage if there was a credit card company that forced you to pay 10% of your balance each month....

EDIT: Watchman, I hadn't even read your post. I love the analogy.

Message Edited by MinnesotaJ on 02-24-2009 08:38 AM

[MattH]

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@specultr wrote:

Watchmann,

You should watch the documentary talked about above. In it, Prof. Warren explains that most credit problems are caused by divorce, medical illness, and job loss. Besides, I think it's a little harsh to tell someone that they're at fault for everything crappy in their lives when the credit industry preys upon the consumer and the government does everything it can to protect business, not the consumer. It's a moral outrage that if you get severely sick in this country, you're probably going to have to declare bankruptcy or not get the medical help needed.

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I agree 100 percent that health care in the US is a scandal, in just about every other developed country they have some kind of national healthcare.  Study after study has demonstrated many other countries deliver comparable or better outcomes to their people at dramatically lower cost.

It is also true that most credit problems are triggered by events beyond the control of the individual.

HOWEVER, an individual who consistently lives above his or her means and uses debt to finance that spending is making himself or herself dramatically more vulnerable to any unexpected events than is an individual who consistently lives below his or her means in order to accumulate savings.

Just as we today live in what medical researchers call an "obesigenic environment" that makes it more difficult for people to control their weight, we in the US currently live in a "debtigenic environment" that makes it more difficult for people to control their debt.  Thing is, this debtigenic environment was to a significant extent deliberately created by what my wife calls "credit pushers."  Now we as a nation are paying for this with a deadly attack of fiscal thrombosis.

[MattH]

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@MattH wrote:

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@specultr wrote:

Watchmann,

You should watch the documentary talked about above. In it, Prof. Warren explains that most credit problems are caused by divorce, medical illness, and job loss. Besides, I think it's a little harsh to tell someone that they're at fault for everything crappy in their lives when the credit industry preys upon the consumer and the government does everything it can to protect business, not the consumer. It's a moral outrage that if you get severely sick in this country, you're probably going to have to declare bankruptcy or not get the medical help needed.

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I agree 100 percent that health care in the US is a scandal, in just about every other developed country they have some kind of national healthcare.  Study after study has demonstrated many other countries deliver comparable or better outcomes to their people at dramatically lower cost.

It is also true that most credit problems are triggered by events beyond the control of the individual.

HOWEVER, an individual who consistently lives above his or her means and uses debt to finance that spending is making himself or herself dramatically more vulnerable to any unexpected events than is an individual who consistently lives below his or her means in order to accumulate savings.

Just as we today live in what medical researchers call an "obesigenic environment" that makes it more difficult for people to control their weight, we in the US currently live in a "debtigenic environment" that makes it more difficult for people to control their debt.  Thing is, this debtigenic environment was to a significant extent deliberately created by what my wife calls "credit pushers."  Now we as a nation are paying for this with a deadly attack of fiscal thrombosis.

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By odd coincidence, Liz Pulliam Weston has some sage advice on the need to prepare for emergencies in her latest column.