Copyright 1998, 2015 by Jim Hull

(Please cite the author if you quote from this work)


I have three credit cards. No, make that two; one is a "charge card," a different animal. I use them for convenience - they're often simpler than cash - and I never spend more than I have in my checking account. Each month a statement arrives and I always pay it off in full. My credit report (I've looked) says things like "paid as agreed," "no adverse information," and "never late." I don't charge much, but I pay it off promptly. Sounds pretty upstanding, stable, and reliable, eh? You'd think my credit status was pretty flawless.

Well, it isn't. Recently I've learned that, in the credit industry, people like me are regarded with barely concealed contempt. We're known as "deadbeats" or "freeloaders." We're considered a waste of the banks' time.

How can this be? I thought a deadbeat was someone who refused to fork over what he owed. I shovel it at them every month without fail. Not good enough.

In the old days - back when American Express and Diners Club ruled the roost, while Visa was the fledgling Bank Americard - merchants got dinged for about five percent of every purchase charged to plastic. This worked nicely if customers were well-heeled, as in the case of American Express: profit margins were high enough, and everybody won.

Then along came Visa and MasterCard, who charge much less per purchase, so that in time the little mordida from the shopowner dropped to around one-and-a-half percent. Now that's a much better deal. The result is that you can use your Visa card just about anywhere, but it's tough to find a place that will honor American Express. And when was the last time you saw a Diners Club card?

It costs about $25 a year to manage a credit-card account. Let's see: $25 is one-point-five percent of... carry the ten... $1,667. So you must spend that amount each year or the card company loses money on you. Well, $1,667 isn't that hard to spend in a year: it amounts to a little under $140 a month. If you charge more than that - and who doesn't? - the card company is now in the black, but in dribs and drabs. For instance, were you to spend $10,000 in one year on your Visa, they'd profit by about $125 ($10,000 times 1.5% less the $25 maintenance cost). I can do better than that, blindfolded, in the bond market.

To a bank, that sort of return is pocket change. If you pay it all off each month, the game won't be worth the candle to them. On the other hand, you might get a little overextended, and can't quite pay everything at month's end. Now the real magic begins. Suddenly you owe them the charges PLUS interest, usually sixteen percent and up. It turns out the average card holder owes somewhere between three and four thousand dollars. That works out to nearly $500 in interest fees for the card company. Tack that onto whatever they've racked up at point-of-sale, multiply it by tens of millions of card holders, and we're talking about walking-around money.

How does American Express survive? After all, their little green plastic plates are "charge cards" rather than "credit cards": you're expected to pay your bill in full every month. (Late-payment penalties are severe, something like a 25% annual rate plus fines.) They make money in three main ways: they charge more per sale than Visa or MasterCard (about a full percent more), they extract a fairly high annual fee - currently $55 - from each card user, and they get most of their action at tony stores, where the take is higher. AmEx has also climbed onto the debt-industry merry-go-round with their Optima credit card, which behaves just like a Visa and can get you into exactly the same kind of trouble. Finally, they now offer a deal whereby a cardholder can set aside specific charges - usually travel expenses - to be paid over time; in effect, this transforms American Express cards into credit cards, and the interest-rate game can begin in earnest with their charge-card customers. Perhaps someday there won't be charge cards at all. Credit-card interest payments are clearly the way of the future.

Still, the basic American Express account would seem like the perfect option for me. They WANT me to pay it off on time. But there are drawbacks: there's that annual fee; it's hard to find places where I can use it; small merchants sometimes beg me to use another card because the extra service charge from AmEx wipes out the tiny profit on the sale. (I've mentioned this to the AmEx customer-service folks, who then ask me to rat on the poor merchant.)

So I also have a Visa and a MasterCard. As far as I can tell, all I need is the Visa: I've never seen a store that took one and not the other, and rarely have I proffered my American Express card in a place that didn't also accept Visa. What's more, mine is a Platinum Visa, which provides roughly the same perks as the AmEx. So why not dump the green card?

Well, there's that little problem about me being a "deadbeat." Since I pay off my cards on time, Visa and MasterCard only make a trickle of profit from my accounts. I'm not in debt to them. I'm not "putting out." I'm not forking over what they wish I owed them. I'm not playing the game. I'm a freeloader.

Suppose I dump the AmEx card. Suppose, later that month, the Visa bank purges its accounts of "freeloaders" like me. It's perfectly legal - after all, Visa owns the cards - and it's been done before. Meanwhile, I hardly use the MasterCard at all (why pay three bills each month?), so they might suddenly drop me like a bad habit.

I could end up with no cards at all!

But Visa and MasterCard haven't given up on me. Oh, no! Not by any means. From time to time they announce, with fanfare, that I've earned a "holiday" and don't have to pay a thing that month! I can relax and let it ride! Of course, interest on that statement will accrue, but who's counting? It's a holiday!

And wait, there's more! Along with each month's statement come these charming little blank checks I'm given to spend. They're called "credit card access checks" - in fact they're cash advances - and with them I can dig myself into debt faster than you can say "A-P-R." What's so charming about these checks is the soothing spiel that accompanies them. "Take that extra vacation," the offer intones. Or, in December: "It feels great to give a gift that is appreciated by all! . . . . access checks enable you to give everyone on your list just what they are wishing for." (Oh, goodie! Let's go shopping!) "Make your dreams come true! If this is the holiday season, can your winter vacation be far behind?" (Well I s'pose so! Now, jes' how'm I gonna pay fer all that? ... I know! A nice cash advance from my credit card! Anyhow, who's countin'? It's the holidays! )

At the new year, along with a temporarily reduced APR, I get more helpful advice: "February. Get something special for your Valentine. March. Treat yourself to a great winter vacation. April. Square it with Uncle Sam. Pay with an access check. May. Pay for Home Improvements, Landscaping and a gift for Mom. . . . We really hope you start taking advantage of your special . . . APR . . . . "

I'll bet you do.

When someone says, "Here, don't worry, just enjoy some of this," aren't they usually a PUSHER? Doesn't this whole come-on sound like a drug dealer trying to hook a customer? Consumer debt is one of the growing problems in America. Lives are wrecked by it; people take to drink, lose their jobs, get divorced, even commit suicide because they've lost control of their finances. Yet giant banks can peddle debt with impunity, while AIDS patients can't legally smoke the pot that would alleviate their symptoms.

As it happens, I think the banks have a perfect right to offer this sort of loan. Caveat emptor, and all that. But for fairness' sake I also think drug dealers should be let off the hook.

There's something wrong with an industry that thrives on human weakness. Not morally wrong (though I won't argue very hard about it), but fiscally wrong. This is one of the few industries that require its customers be a "little bit" fiscally incompetent but not completely out of control. What other enterprise seeks out customers who might not pay their bills?

Industry pundits would laugh at my pointy head for raising such concerns: after all, using differential statistical analysis, it can be demonstrated that banks' annual return on these investments is such-and-so, and bad-debt percentages can be controlled, and so on with the gobbledy-gook. But when all the smoke and mirrors have cleared, what's left is a business involved in risk, and no risk can be completely controlled. It might not be wise to bet on an industry that depends on over-extended consumers who could default if the economy goes south.

Consumer debt has risen in the late 1990s, and government officials and others have called banks to task for encouraging - in their quest for customers - the kind of insolvency that has filled the bankruptcy courts to bursting. The competition gets fierce, the pool of potential cardholders becomes more marginal in quality, and soon the bad-debt accounts are scattered like bodies across the economic battlefield.

My father, who spent most of his life in mortgage finance, groused during the 1980s that the Young Turks of Wall Street had become so arrogant they were dismissing the warnings of their forebears - himself included - who preached caution and sound fundamentals. "Well, why listen?" the new portfolio managers might have sneered. "It's a bull market! Look at Michael Milken! Who needs the old fuddy-duddies now?" My father didn't live to see the junk-bond debacle or the real-estate crash or the recession that followed, but he did take a dark kind of glee, in 1987, when the stock market lost over twelve percent of its value in one day. The chickens were coming home to roost at last.

What has this to do with the credit-card business? In finance, it seems, everything's great until it isn't. The tigers of Asia - titans of growth such as Korea and Japan and Hong Kong - looked great, until one day their debt load collapsed. Milken and Boesky could do no wrong until their junk-bond empires imploded. The stock market climbed and climbed until even sane people were giddy, then it crashed. What makes the purveyors of plastic think they are exempt from these trends? Banks have been known to fail. Insurance deposits have run out. "Nah. It can't happen again. We're insured, we know what we're doing." That might wash, except for all the newfangled computer trading and derivatives and junk bonds and multi-national corporations and free trade and a thousand other changes that make the 1920s look like ancient history.

Of course a lot of bankers know the risks, but they're caught up in a highly competitive business. They've got to find new customers or trick up the accounts they already have. And we end up with those smarmy come-ons in the mail.

Me? I simply tear up the cash-advance checks, right across the account number, then place the left half in one trash can and the right half in another, miles away. (I'm not about to let some trash burglar use those checks in my name.) There are plenty of ways to enjoy a good life - with a little planning - that don't require months or years of suffering later under a load of personal debt. So I'll pay my bills on time with money I already have, thank you very much.

And that, it seems, makes me a deadbeat.



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