Unpimp Your Credit Score, Say Yahhhh

March 15, 2006 6:57 AM

In the last few years, Fair Isaacs, along with the FTC have made considerable effort in educating us in how our credit scores are derived. But is the whole system about to change? In a somewhat quiet AP story, the three major credit bureaus, Equifax, Transunion, and Experian, announced they had agreed on a new common formula for generating your credit scores: VantageScore. [more inside]
posted by poppo (42 comments total)

In the past, and until the coming switchover ("later this year"), these three institutions generated scores for you which could differ by substantial amounts, due to the fact that they used different models and data. They claim that's about to change, and for the benefit of us, the consumers.

There is a serious lack of detail save for the fact that the new score range will be 501 to 990 rather than 350 to 800. Also mentioned, it will rolled out to lenders before consumers.

I for one am skeptical.
posted by poppo at 6:57 AM on March 15, 2006

Also, apologies to non-Americans, I realize this doesn't apply to you.
posted by poppo at 6:58 AM on March 15, 2006

I have horrible credit according to Equifax, purely because I don't have a long history in N. America (I'm an immigrant). I scored in the 25% percentile, to be precise.

However as soon as anyone looks at my credit I get immediately approved, because I pay everything off every month, don't carry any balances, and have a large secured line of credit which I currently don't use.

So you have to remember that it's not just the number that people look at when they extend credit.
posted by unSane at 7:13 AM on March 15, 2006

nothing a group of creditors all agree upon can possibly be good for those to whom they lend money.
posted by wakko at 7:14 AM on March 15, 2006

Hmm...

What I would really like to see is a 'direct risk factor', meaning if I loan you $1000, how much money am I likely to lose on average?

In other words, if I took 10,000 people exactly the same as you, what rate of interest would I have to ask for in order to ensure that I break even, since some of you would not pay.

That would be more useful, I think, then this arbitrary number.
posted by delmoi at 7:15 AM on March 15, 2006

The "AP story" link is actually a TransUnion press release to Business Wire. /pedantry
posted by gubo at 7:22 AM on March 15, 2006

I suspect these numbers will either complement FICO or possibly replace it on the consumer-debt market (credit cards, as opposed to mortgages.) FICO is most carefully considered and built around mortgage lenders and borrowers. For example, even with a "lower" FICO score you can still qualify for a mortgage but not qualify for a credit card. The problem there, (I'm speculating, but it feels right) is that credit card companies often automagically reject a certain FICO rating that a mortgage company wouldn't.

If this new system works the way they say it will, then that disparity may go away, which is a good thing, IMHO.
posted by TeamBilly at 7:25 AM on March 15, 2006

I wonder if this also means the three will be sharing data -- would make things less complicated for consumers, but would also eliminate the chance that bad entries would be missed by one of the three...
posted by VulcanMike at 7:34 AM on March 15, 2006

Equifax will still be happy to spam you, apparently, despite their claims to the contrary. Isn't it heartwarming that they're in charge of making decisions that'll affect a great deal of your life?
posted by clevershark at 7:40 AM on March 15, 2006

How much do you want to bet that the cost for finding out your new score will be higher than it is at present. While the government made it possible for us to check our credit reports yearly for free, the FICO score still costs you $$.
posted by scblackman at 7:43 AM on March 15, 2006

The "AP story" link is actually a TransUnion press release to Business Wire.

You're right. Here's one of the AP links. Like Transunion, the other bureas also did press releases. Those and the AP all contain the same basic info: Little detail and little critical analysis of the changes.
posted by poppo at 8:19 AM on March 15, 2006

The problem there, (I'm speculating, but it feels right) is that credit card companies often automagically reject a certain FICO rating that a mortgage company wouldn't.

I think the difference is that some lenders actually generate their own "acceptable risk" profiles on you. They're based not on the numerical score they obtain from the bureaus, but from the same data points that bureaus derive your score from: Delinquencies, credit to debt ratio, etc.
posted by poppo at 8:23 AM on March 15, 2006

nothing a group of creditors all agree upon can possibly be good for those to whom they lend money

That's sort of what I was thinking: Things like collusion and price-fixing come to mind.
posted by poppo at 8:25 AM on March 15, 2006

I work at a credit union, and this is going to mean work for our lending staff. Our entire system of lending is based on the old scoring. I can't believe this is the first any of us have heard of it... you would think TransUnion would send something out to the lending organizations that use them.

I'm not worried as a consumer about this (not as much as I was about bankruptcy reform). There usually aren't that many differences between the three credit reports anyway, and places like where I work only check one, typically.
posted by JeremyT at 8:33 AM on March 15, 2006

Credit card companies/banks and their credit score lackies are completely egregiously and sleazily out of control. They're raping the country with criminal interest rates, penalty fees, service fees etc... Yet very very little seems to be happening to curb their power and the labyrinthine sleazy small type they employee to steal your hard earned money. Anyone remember when ATM's where free?? I'm determined to pay off my credit card debt once and for all, cut it up and flush it down the toilet. You should too. Think of it as giving yourself a raise and giving the ultimate finger to these thieves. although what they really deserve is jail.
posted by Skygazer at 8:49 AM on March 15, 2006

Skygazer: You'd have to purre them if you didn't want to clog up your toliet.
posted by delmoi at 8:51 AM on March 15, 2006

Credit card companies/banks and their credit score lackies are completely egregiously and sleazily out of control.

And it is the way in which YOU are controlled.

If you have a dispute with a firm over a bill, if you don't pay it, they can make up whatever they wish - then send it to the credit reporters.

If you opt for court - whoops. That's a negative. JUST going to court.

Many insurance firms use your credit report as a reason to ding you harder.

So the message is - be a good consumer, pay what we hcarge you otherwise we are gonna make things MUCH harder.
posted by rough ashlar at 9:00 AM on March 15, 2006

SkyGazer, I agree that there are unscruplulous people out there committing severe usury but several things come to mind which prevent me from getting up in arms about it...

1) There are many, many options to choose from as far as credit cards go. Chosen wisely, one can use the card accounts wisely and reap the benefits.

2) It is fundamentally necessary to have decent credit to own a house unless you're paying cash for it. Not many people can do that, but many people *can* buy a house this way and the benefits of owning a house really do outweigh renting for most folks.

3) Folks have every right to stop using cards and stop paying interest, but most don't. Cash is still king.

I guess the major point I'm trying to make is that the glut of credit problems in this country stem from people's dependence on financed purchasing, and God knows I used to be one of those people. But the problems there are behavioral - they aren't caused by a credit card cabal - no one holds a gun to your head and makes you sign the cardholder agreement.

Someone smarter than I can weigh in, but I really do believe that a lot of the draconian measures imposed by credit bureaus and credit card companies are reactive to the level of bad debt that they have to carry. These are for-profit agencies, and I can't go nuts if I agree to their terms knowing they're trying to make a buck, too.
posted by TeamBilly at 9:17 AM on March 15, 2006

I had an almost perfect credit, but for one total scam. Some company down in Florida (with over 20,000 bb complaints) basically said I had an outstanding bill with a cell phone provider. Well, the cell provider has no record of it. I guess there is a scam where these fake collections agencies submit bogus claims, then offer to settle for pennies on the dollar to get it off your credit.

I was able to convince 2 of the 3 to drop the negative item, but the third one wouldn't do it. Since lenders throw out the lowest of the 3 reporters, this was fine.

With a single entity, this kind of situation would either be better (only have to ask one place to drop off fraudulant items) or worse (only one mistake kills you). I wonder how it will play out.
posted by cell divide at 9:20 AM on March 15, 2006

Yeah, those eeeeevil credit card companies, holding you accountable to the terms you agreed to. *rolls eyes*

If a creditor's terms are not acceptable to you, simply do not accept credit from them, and you will not be subject to their terms. It's sort of like magic.
posted by kindall at 9:24 AM on March 15, 2006

There will still be three different credit bureaus, which means the above will still happen. I think all this means is that they will use a standard scoring system.
posted by JeremyT at 9:24 AM on March 15, 2006

Canadians - You can get your credit report for free any time in writing - but not the Fico score - that costs $21.95 and includes a full credit report, and interpretation (what it means to you in terms of approvals, and interest rates)

It took a while for Canadian credit reporters to start using Fico scores, so we'll likely get this VantageScore at some point too.
posted by SSinVan at 9:43 AM on March 15, 2006

Yeah, those eeeeevil credit card companies, holding you accountable to the terms you agreed to. *rolls eyes* If a creditor's terms are not acceptable to you, simply do not accept credit from them, and you will not be subject to their terms. It's sort of like magic.
posted by kindall 8 minutes ago

I suppose you could say criminal usury is like magic (amazing how much of your money can vanish. Wink wink nudge nudge).

I'm more of the opinion that it's a shell game run by cynically duplicitous people, yet as TeamBilly points out, if you want to build up a credit history (to get a loan for a house or start a business), or do business on the web, you need to deal with them, that being the case, you'll be a lot healthier financially (and happier) if you deal with them in no uncertain terms with a strong offensive. If you're lucky enough to have a lawyer on retainer, have him or her look at everything. I'm not kidding. Have you ever noticed how they ply impressionable college kids with offers? Have you ever noticed how they're dying to give you "0%" intro offers? These are all marketing scams psychologically designed to get you on the slaveship and paying criminal interest rates. Ever miss payment due to sickness or some other emergency (i.e., death in the family, job loss errr a little thing called 911...true story). Fuck you they say, now your interest rate has been jacked up to 29% plus you owe us a $39 late payment fee (the govt soon to allow $50 Penalty fees), oh wait you have another card or two. Fine, they all notice thel ate payment and decide that your rate has gone to the default APR of 29% for them too. Want to get some justice about it, perhaps a class action suit? No dice thry smirk. All credit card agreements carry a "binding arbitration' clause (this was enacted a few years ago), meaning that only a negotiator (not a public court) can look at the complaint. Hell, want to pay your bill in time? Fuck you, we decided to a.) change the URL for the online payment site, or b.) The server was down or c.) we have a new PO BOX you have to send the bill to or we can take a payment over the phone and charge you $15 for it (!). If you're late you'll still owe $39 in penalty fees and it happens again we'll raise your rate to the default 29%. What's that?? you didn't realize March 1st would come up so quickly, what an idiot you are, it's a LEAP YEAR (I'd love to see how much they made on that alone in penalty fees. Don't think they pull that sort of shite, think again..). What's that you want to pay off your card and close it? Well okaaaay ...we'll drag our heels as long as we can...and need to give you a half hour spiel about this amazing new introductory offer so you can remain our slave. You still want to close it? Of course it's closed now. Sayonara sucker!

At which point they neglect to disclose that unless you specifically state that your account was closed due to customer's request, it'll seem to the credit score companies that it was closed due to punitive action and your credit rating goes down. A parting shot from a real class act eh? Really, it's exactly like Tony Soprano said in an old episode, when he lent money to gambler (knowing the guy would eventually have to give him his house and business) paraphrasing here: "it's like credit cards...a sucker's deal and I'm just doin' business....I can't not take his money, he's prey and I'm the predator."

NB: All these techniques have pervaded the customer service industries and are now in regular use by telephone companies, utility companies, retailers, even employers and the government. So the great curtailment of consumer rights across the board and the concurrent ebb of civil rights. I think it's connected and cut from the same cloth. That cloth is embroidered with a pithy quote from the book of PT Barnum. I'm sure you've heard it...There's a sucker born every minute. except now in parenthesis it also says "and if they're not a sucker treat them like one anyway and take away their right to seek justice and they will be not only suckers, but slaves...fuck'em if you can.
posted by Skygazer at 11:10 AM on March 15, 2006

Ever miss payment due to sickness or some other emergency (i.e., death in the family, job loss errr a little thing called 911...true story). Fuck you they say, now your interest rate has been jacked up to 29% plus you owe us a $39 late payment fee (the govt soon to allow $50 Penalty fees), oh wait you have another card or two. Fine, they all notice thel ate payment and decide that your rate has gone to the default APR of 29% for them too.

What that means is that you should be sure you can always make your monthly payments before you apply for credit. As I said, if you don't like the terms (which are clearly spelled out on the application), don't apply for credit with that lender. When I see "two-cycle average daily balance" on the Discover application I say "I'd better not carry a balance on that card, because it means I'll pay more than I ordinarily would as I'm paying it off." And then I simply don't carry a balance on the Discover. Simple. The Discover's good for online purchases, though, because they'll give you temporary credit card numbers you can give to merchants in lieu of your real number. Different cards for different needs.

Banks pile on the penalties because the best indicator of your future payment history is your past history. If you miss a payment, then odds are good that you will miss more in the near future. They charge you $30 fees and 30% interest to have a better chance of getting their money back before you stop paying entirely and to give you incentive to pay promptly. Personally, I think that's being lenient. If I'd loaned you money and you missed a payment, I'd want all my money now because I don't want to risk losing all of it.

If creditors were not allowed to charge these fees, then a large segment of the population (those without significant assets to secure loans) would simply not be allowed to have a revolving credit account at all and would never be able to prove themselves creditworthy.

Want to get some justice about it, perhaps a class action suit?

What justice is there in letting you out of your agreement? What grounds are there for a class action suit? Again, you agreed to the terms. If you didn't like the terms, then you shouldn't have accepted the credit. If banks were going to go easy on you when you didn't pay on time, why would anyone other to pay on time?

Now there are certainly cases in which creditors have violated their side of the agreement or broken the law -- and in these cases they can't weasel out of it with a binding arbitration clause in their cardmember agreement, either. Throw the book at 'em. But in my experience, this is quite the exception, not the rule.

What's that?? you didn't realize March 1st would come up so quickly, what an idiot you are, it's a LEAP YEAR (I'd love to see how much they made on that alone in penalty fees. Don't think they pull that sort of shite, think again..).

I don't think it's a bank's responsibility to make sure you can read a fucking calendar. I mean, you don't leave your payment for the last minute anyway, do you? If you do, then you're gonna get hosed occasionally. Solution: don't leave your payment for the last minute!

Some people do have to learn responsbility the hard way. I sure did -- I ran up $50,000 in credit card debt, and some of it was at 30%. But it's certainly not the banks' fault I ended up so deep in the hole and wasted several years of my life paying it off and then re-establishing a good credit history. I did it all to myself despite a lifetime of being warned against it by my parents and other responsible adults. All I'd get by trying to blame the banks for my past is a load of self-deception.

But now I have a decent credit score (not perfect, but give it another couple years) and routinely make money from my credit cards. Learn your way around the system and you'll be rewarded. If you don't do that, sure, you'll get screwed, but whose fault is that -- especially if it happens more than once? If I was late on a payment and my interest rate got jacked up to 30% and I got slammed with a hefty fee, it would be more productive for me to make damn sure I was never late on a payment again than to bitch and moan about how unfair it was that they were holding me to my word.
posted by kindall at 1:13 PM on March 15, 2006

Kindall, everything you say is true. But there is an important point of Skygazer's that you conveniently skipped over: The idea of needing credit.

Everyone needs credit eventually. It may be for a car, a home, a school loan etc. No one but our top 1% has cash to lay out for these large purchases. To get credit, you'll need a credit history.

Your point that you're signing an agreement to which you must adhere is of course correct, and if you can't adhere to it, you are rightly penalized.

But let's be honest, all these lenders add in the same ridiculous clauses wrt late payments, penalties and so on. If you can shop for a credit card without such clauses, I'm not aware of one.
posted by poppo at 1:29 PM on March 15, 2006

top 1%
eh, I would take this out-of-my-ass figure back. more than 1% of our pop. has cash enough to pay for a new car, but you get my point
posted by poppo at 1:48 PM on March 15, 2006

Yes, you'll need to have a credit card and use it to build credit. But my point is, that can be done without ever paying any penalties or even interest at all if you are responsible.

I did mention the issue of needing credit obliquely: "If creditors were not allowed to charge these fees, then a large segment of the population (those without significant assets to secure loans) would simply not be allowed to have a revolving credit account at all and would never be able to prove themselves creditworthy." The only reason you'd want to prove yourself creditworthy is because you need credit, of course, or will eventually.

Mortgages and even auto loans are reasonably easy to get even with moderately bad or no credit, since they are secured -- you'll just pay more. And since school loans can't be discharged in a bankruptcy, pretty much anyone can get them, even before they have credit of any other kind or even much income. So it's important to have a good credit history primarily so you can get the best deals on your future credit needs. Nobody has to do entirely without credit, really.

Nobody is forcing anyone to get into the kind of situation Skygazer describes. "Slave"? "Scam"? "Criminal"? These emotionally-loaded words are not useful. Even at my darkest financial hour, I knew that the suckness was entirely my fault for misusing my credit tools. If you juggle chainsaws long enough, you're gona lose a hand.
posted by kindall at 5:00 PM on March 15, 2006

kindall: "[leaving aside class action suits] Now there are certainly cases in which creditors have violated their side of the agreement or broken the law -- and in these cases they can't weasel out of it with a binding arbitration clause in their cardmember agreement, either. Throw the book at 'em. But in my experience, this is quite the exception, not the rule."

Is this just wishful thinking, or do you know of cases where the arbitration clauses have been successfully challenged? By the plain (tiny) text of the so-called agreement (which is actually not negotiable at all), the bank could "accidentally" or negligently or even deliberately add a false charge to someone's balance, or make a false credit report, or almost anything else you can imagine, and if the arbitrator ruled for the bank, the cardholder would have no recourse to the courts. Even the applicability of the arbitration clause is barred from the judicial system, according to the terms.

kindall: "If you didn't like the terms, then you shouldn't have accepted the credit."

If a contract can justify anything and everything without limit, which is your hidden premise, then why not a kidney, or child, or a lifetime of slavery? There is another point of view, that maybe there should be limits on what can be demanded as conditions of commercial transactions. In some European countries, for example, a business cannot demand surrender of basic constitutional (or EHRD or whatever) rights as a condition of a consumer transaction.

You'll undoubtedly be thrilled when these tactics start spreading. Once all kinds of businesses discover the power of the arbitration clause, and creative variations of it, the only USians who will still have access to the courts will be those living in the wilderness like Kaczinsky, because everything else will require contracting out of the bill of rights.
posted by jam_pony at 6:23 PM on March 15, 2006

Ever miss payment due to sickness or some other emergency (i.e., death in the family, job loss errr a little thing called 911...true story).

Ever use a credit card when you were sick or had an emergency but had no cash?
posted by mullacc at 8:08 PM on March 15, 2006

By the plain (tiny) text of the so-called agreement (which is actually not negotiable at all), the bank could "accidentally" or negligently or even deliberately add a false charge to someone's balance, or make a false credit report, or almost anything else you can imagine, and if the arbitrator ruled for the bank, the cardholder would have no recourse to the courts.

Well, except a couple minor facts: 1) most of the really bad things you're afraid of banks doing are covered by laws and a contract can't make it legal and 2) I have yet to see a credit agreement that lets a bank (say) randomly add charges to your account, so even if they did do that they'd still be in violation of the agreement, and if the arbitrator didn't find for you, you could take them to court.

If a contract can justify anything and everything without limit, ... then why not a kidney, or child, or a lifetime of slavery?

Well, for one thing, what kind of moron would sign such a contract, and would you really want their child or their kidney given their defective genes? For another, it's illegal, but that's kind of redundant given that nobody would sign it.

In some European countries, for example, a business cannot demand surrender of basic constitutional (or EHRD or whatever) rights as a condition of a consumer transaction.

Sort of like here in the good old USA... you can't sign away your life, or your liberty, or your vote... etc.
posted by kindall at 8:08 PM on March 15, 2006

Right on Jam_Pony. Binding arbitration is quickly becoming the rule and not the exception. Beware binding arbitration!!

Kindall, believe me I see your points about personal responsibilty but c'mon...how mnay college kids get into terrible debt before they even realize what's happening to them? On top of it how much more power do the banks have then you or I? Get real, friend. The credit card Co's and banks are an abomination, one we must fight.

The following points need to be repeated:

-Put 25% on top of the eventual cost of any purchase you make with credit cards.

-Pay it all off, as soon as you possibly can.

-Learn everything you can about using a credit card. Here's a good resource:

http://www.bankrate.com/brm/rate/cc_home.asp

-Cut up all your cards and flush em down the toilet, except for one. Put that in a safe place for use only in case of absolute emergency.

-Try and live a relatively debt free life unless you're buying a home or starting a business.

-Write your local senator about the abuses being waged by banks and credit card Co's.
posted by Skygazer at 8:09 PM on March 15, 2006

According to Harvard Law Professor Elizabeth Warren, the credit card companies are misleading consumers and making up their own rules. "These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print," Warren tells FRONTLINE.
posted by Skygazer at 8:29 PM on March 15, 2006

how mnay college kids get into terrible debt before they even realize what's happening to them?

A lot, I'm sure. College is expensive, and student loans can't be forgiven. This is almost certainly going to be where the bulk of a college student's debt is.

As long as people can read, and the terms of any credit offer are made available (as they are required to be by law), and as long as the language is not particularly obfuscated, which it doesn't seem to me to be, then I've got no problem with it. Outright fraud is still illegal. What the problem is is that people get greedy and accept credit on bad terms in order to be still paying for it in a year or two when it's basically worthless and they have to buy another.
posted by kindall at 8:42 PM on March 15, 2006

The shameful thing about credit card companies is that the most profitable strategy is to exploit the weakest customers by charging late fees and increasing APRs after the first late payment.

However, the real problem is consumer spending habits and the tendency for people to try and live beyond their means - of course, credit card companies are enablers but the problem didn't start with them. Coming down on hard on the credit card industry would have ripple effects that no politician wants to even think about.
posted by mullacc at 8:56 PM on March 15, 2006

"Well, except a couple minor facts: 1) most of the really bad things you're afraid of banks doing are covered by laws and a contract can't make it legal and 2) I have yet to see a credit agreement that lets a bank (say) randomly add charges to your account, so even if they did do that they'd still be in violation of the agreement [...]"

I don't think you "get it". Whether an action is a violation of the "agreement" or not is irrelevant if it can't be litigated. If the arbitrator decides for the bank, that's the final decision, and it doesn't matter what the facts are.

", and if the arbitrator didn't find for you, you could take them to court."

No! Try to understand, that is exactly what the clause prevents. If you think the arbitrator's decision is wrong, it's too bad - there is no recourse. If you try to have it heard by a court of the US or your state, the bank waves the "agreement" and the court tosses the case out. The only thing a court will do is enforce the arbitrator's decision.

"Well, for one thing, what kind of moron would sign such a contract, and would you really want their child or their kidney given their defective genes? For another, it's illegal, but that's kind of redundant given that nobody would sign it."

My point was that if you don't recognize any limit on what a contract may obligate a person to do, then you're saying that a contract making a person a servant-for-life is as legitimate as one requiring payment of the electric bill. Yes, some extremes are illegal, but the question is whether you recognize any principle that justifies extreme terms being illegal. If so, what is it? What's the outer limit, according to you?

"Sort of like here in the good old USA... you can't sign away your life, or your liberty, or your vote... etc."

Inconsistency again. Access to the courts is a 1st amendment right and you're saying it's fine for banks to require it to be given up as a condition of a consumer transaction. But voting (14th amendment I think) is somehow more basic and the same rule doesn't apply, you say? Why is one alienable and not the other?

My suggestion is merely that there ought to be some limits on contract terms, at least when (a) there is a great difference in bargaining power (b) the product or service is essential to a middle-class life (c) there is no practical ability to obtain better terms by shopping around.
posted by jam_pony at 9:25 PM on March 15, 2006

Some excellent points made here, for many of which the theme is that credit is not a right, it's a privilege that consumers choose in order to accomplish certain tasks.

I generally feel that the 30-day window I have to pay my credit card bills is of excellent value alone. They've given me money when I did not have it or didn't want to spend it from my own account, and have provided me a generous window in which to return that money -- and they even give me money back and rewards for it!

If on the rare occasion I need a short-term loan and want to use a credit card for such purposes, I'll find one with 0% APR for a year, save aggressively during that time, and pay it off in one lump sum right before the rate expires.

All of this investment on my part has cost negative dollars, due to rewards, and contributes to a positive credit rating that helps me pay lower costs when I really do need to spend someone else's money for an extended period of time, such as car and home purchases.

How did it ever get into peoples' minds that spending other peoples' money was a free entitlement?

Is credit marketed? Sure! Why the hell wouldn't credit card companies market their cards?
posted by VulcanMike at 2:14 PM on March 16, 2006

Just to clarify, when I said "in my experience, this is quite the exception, not the rule" I meant banks violating their side of the agreement (or the law) was the exception. As a practical matter the chance that any of us will ever be involved in a unresolved dispute with a bank that is worth the effort of filing suit is slim to none.

If you try to have it heard by a court of the US or your state, the bank waves the "agreement" and the court tosses the case out.

To do this, the bank would have to be a party to your suit against the arbitrator, and they wouldn't be.

Access to the courts is a 1st amendment right and you're saying it's fine for banks to require it to be given up as a condition of a consumer transaction.

It's pretty obvious to me that the banks are stipulating arbitration to reduce costs, not because they intend to screw over their customers by depriving them of their rights. It's my understanding that individuals actually tend to come out better against corporations in arbitration than they do in court, and it's easier and less expensive for an individual to initiate arbitration than to bring a suit. There are benefits to you as well as to the bank in arbitration, in other words.

Of course, since you can't sign away your rights, you have not in fact done so regardless of whatever the agreement says. Thanks for reminding me; I was looking at the trees and ignoring the forest here. The clause is basically unenforceable if it comes down to it. I can't say I know whether it's been tested in a court, not following such things closely, but I can't imagine it would hold up. I know non-compete clauses in employment agreements are routinely thrown out in cases where such a clause would unreasonably restrict your ability to find a job. This doesn't seem much different.
posted by kindall at 2:21 PM on March 16, 2006

How did it ever get into peoples' minds that spending other peoples' money was a free entitlement?

Is credit marketed? Sure! Why the hell wouldn't credit card companies market their cards?
posted by VulcanMike at 5:14 PM EST on March 16 [!]

You're spending your own money (and dearly). Like I said (unless you keep flipping cards for the 0% APR and even all that opening and closing of accounts will negatively effect your credit score) add 25% to anything you buy with a credit card.

There's nothing necessarily wrong with marketing per se, but like tobacco companies, credit card companies target the most vulnerable segments of the population, add to that the predatory snags in the fine print and you realize that you, VulcanMike, are their worst customer (more power to you), what they consider a "deadbeat". Their preferred customer is one who, due to job loss or lack of funds takes the bait and becomes mired in the well laid trap of egregious penalty fees and a mind boggling default APR of 30%, not to mention they never have to tell you how long it will take you to pay off your debts or even inform you that minimum payments are a good way to get deeper and deeper into trouble.

What other contractual agreement do you know of where one party can change the terms of agreement for any reason they see fit, with 15 day notice?? And leaves the second party with no legal recourse.

That means you can have perfect credit and be a good customer and everything, yet at any time, if the Banks/Credit Card Co's may change your APR to 30%. It's only a matter of time (especially with rates going up and the industry turning into an infrastructural monster), the only thing holding them back is the amount of competition for new customers. We all know what the course of unchecked power is right?? Please, don't be naive, this what they're counting on. Like any good predatory loan shark (cf. Tony Soprano quote above).

But don't take my word for it read this from a professor in contractual law at Harvard:

I don't know any merchant in America who can change the price after you've bought the item except a credit card company. After you have borrowed the $5,000, they can change the interest rate from 9.9 percent to 29.9 percent. I just don't know anyone else who can do that.
posted by Skygazer at 8:18 AM on March 17, 2006

For a Harvard law professor, Elizabeth Warren is pretty dumb. Her analogies are completely faulty, almost as though intentionally chosen to make the banks look as awful as possible. Contrary to her example in which a store offers to sell you a TV for $X and later decides to charge you $X+Y, it's more like if a store lets you rent a TV for a few months, and then you don't bring it back like you promised, and they charge you late fees, just as the two of you agreed would happen when you rented the TV. That's what credit is -- you're renting money.

There are pretty strict laws about changing terms on existing revolving accounts. If a bank decides to raise the late fee to $50, or whatever, they have to notify you in advance, and if you disagree to the new terms, they have to let you pay off your balance under the old terms (although, of course, you can't put new charges on the account). Seems reasonable to me.

Look at it from my point of view. If you miss a payment, you are at a greater risk of defaulting, because people who have missed one payment are far more likely to miss more payments. The bank can do one of two things: either they can start charging bad risks more ASAP, to increase their chances of getting their money back, or they can charge ALL their customers more, even the ones who have never missed a payment, to cover the money they lose on the bad risks. Since I am now a good user of credit, I naturally like the option where YOU pay for your screw-ups rather than me.

It is unfortunate that it becomes a self-fulfilling prophecy to some extent (i.e., once you are deemed a bad risk, the fees make it harder to catch up) but the solution is most emphatically not to have the bank try to make up their losses by charging good payers more. A better solution might be some sort of security interest, like the Sears store credit card used to have (and may still for all I know) whereby they can come take your stuff if you don't pay for it. Unfortunately that is a bit difficult logistically, especially since I don't think the bank would want back that fancy dinner you had at the French Laundry once you've eaten it.

If people are deceived into making bad credit decisions by moustache-twirling creditors who outright lie about the terms, that's bad, but there are many laws against that sort of thing and I don't consider it a serious problem with the credit card industry as a whole. I have read plenty of cardmember agreements, and they are really pretty straightforward once you have figured out the first one. People who don't understand them can ask someone who does, or just not apply -- you should never sign a contract you don't understand, after all.
posted by kindall at 1:48 PM on March 17, 2006

For a Harvard law professor, Elizabeth Warren is pretty dumb.

That's weak and uncalled for. Why attempt to discredit someone who's trying to protect consumers from large out of control corporations with armies of MBA's, lawyers and pyschologically inclined marketers. (I'm half wondering if you're in the industry Kindall. How about some full disclosure here.)

Her examples are exactly right. She's shedding light on how abusive credit card policies have become. Not just effecting bad borrowers but regular people who're playing by the rules and trying to make ends meet. It's a wake up call. Credit debt is a certain slow boil financial death if one isn't careful. It's designed to be just that and people need to balance their needs with that in mind.

That's what credit is -- you're renting money.

Too bad some people are using it to pay for medical emergencies for themselves or their kids..

There are pretty strict laws about changing terms on existing revolving accounts. If a bank decides to raise the late fee to $50, or whatever

Okay, but why give only 15 days to contest the new terms and bow out??

Look at it from my point of view. If you miss a payment, you are at a greater risk of defaulting, because people who have missed one payment are far more likely to miss more payments.

They're also more susceptible to being trapped and abused.

but the solution is most emphatically not to have the bank try to make up their losses by charging good payers more.

Hey, the new penalty fees at upwards of $50 will apply to all consumers, the good and the bad.

People who don't understand them can ask someone who does, or just not apply -- you should never sign a contract you don't understand, after all.

Or even sign a contract whose terms can be changed at any time for any reason and strip away the pursuit of legal recourse. Maybe a new way should be made available to establish credit history. As it stands, the only way to do so is opening oneself up to doing business with predatory and unethical entities.

Is it any wonder that: According to the Better Business Bureau, credit card and banking companies are the subject of a record numbers of complaints. More than any other industry.
posted by Skygazer at 8:23 PM on March 17, 2006

For a Harvard law professor, Elizabeth Warren is pretty dumb.

That's weak and uncalled for. Why attempt to discredit someone who's trying to protect consumers from large out of control corporations with armies of MBA's, lawyers and pyschologically inclined marketers.

That's rather begging the question, isn't it? I mean, it assumes that banks are out-of-control, etc., which is what we're arguing here in the first place. It's a little like if we were having a debate on whether the Earth was flat and I asked you why you'd attempt to discredit someone who was only trying to spread the word about the Earth actually being round, just as if I'd already won the debate.

And I only called her dumb "for a Harvard law professor" and moderated it with "pretty." I mean, she could still be a lot smarter than most people. I'll admit that once I got past that first whopper, she did make some good points, although the interviewer kept lobbing her softballs; it was "so tell us more ways in which the banks are screwing us" rather than "so what is your evidence that the banks are screwing us?" To an extent it reminded me of Chomsky and other leftist loonies. Sure, you could look at the world as full of eeeeeevil corporations who want to make you their slave. Or you could look at the world and say "wow, look at this huge variety of things that companies are offering; how can I best take advantage of it?"

Too bad some people are using it to pay for medical emergencies for themselves or their kids..

A simple thought experiment here: ask yourself "self, what price would I pay to get my kids vital medical treatment?" And the only possible answer, of course, is "any price, any price at all." Even the worst lenders stop far short of extracting the kinds of interest and fees they could extract from people who would literally pay anything.

Of course, people should have health insurance and they shouldn't have kids they can't afford. But that's a tangent and not really relevant here because there are many unexpected expenses that come up besides the ones you mention. Still, many "emergency" expenses are actually fairly predictable over the long term. If you have kids they're going to cost you, on average, a certain amount each year. You can go look up what that number is, look at your savings, and go "hmm, better not have kids just yet." It is perfectly possible.

As a more concrete example, my car's maintenance schedule clearly spells out it will need a timing belt replacement at 60,000 miles, so if I wake up next summer go "ZOMGWTF how will I pay for this!!!111one1!" I am a total and complete idiot. Some things are "emergencies" only because they haven't been properly planned for. Most people simply don't have any idea what they need to budget for typical expenses, they don't have any savings to smooth out the bumps, and they buy things they can't truly afford. I think we can both agree that most people need to save MUCH more than they do. Most financial planners agree that an important first step to financial freedom is having 6-12 months' worth of typical monthly expenses in an emergency fund.

I'm half wondering if you're in the industry Kindall. How about some full disclosure here.

I'm a technical writer for a small software company and have never worked in finance. I had some financial troubles a few years back when I was running a consulting business, and ended up $50,000 in debt, but I paid all that off some time ago and currently my credit is pretty good. Not perfect, but pretty good. (In about three years it will be perfect.) In other words, I have been one of those people you think the banks are being so unfair to. One time I had no food in the house, no money in the bank, and a blessed coupon for a free pint of Haagen-Dasz ice cream showed up in the mailbox and that's what I had for dinner. That was cutting things mighty fine, I thought at the time, and vowed it wouldn't happen again. (A payment I was expecting from a client showed up the next day, hallelujah.)

Okay, but why give only 15 days to contest the new terms and bow out??

Well, I mean, exactly how long do you need to read a whole new cardmember agreement, assuming that's what they send you? (Usually they just send you an amendment, actually -- much shorter.) Let's say it's an hour. 15 days is thus 360 times the amount of time you need to decide whether to accept the new terms. I mean, how long do you think people really need to think it over? If the banks gave you a month, you'd probably be saying they should give you two.

Sure, some people might not "get around to" reading the mail for a few days. Personally I read anything that looks like it's from a bank right away, because it probably has to do with my money, which is a pretty important thing to keep on top of. In fact, these days, most anything that people are willing to pay money to send you on paper (that's not obviously an ad) is probably fairly important to read right away. They are, in other words, teaching you (brutally but effectively) to pay close attention to the important things. The banks are of course not doing this intentionally, not even close, but that doesn't mean it's not a lesson they'll happily teach you if you need to be taught.

They're [bad risks] also more susceptible to being trapped and abused.

Yeah, I did talk about that a bit in another message. It's unfortunate that so many people get socked with penalties just when they're least likely to be able to afford them, but I believe this situation is largely caused by poor planning. The banks "take advantage" of it, but no matter what late fee they charge, there's always going to be someone who can't afford it and who will get sucked into the downward spiral. But late fees must exist and they must be reasonably painful, or else nobody would bother paying their bills on time.

I once lived in a town where the electric utility charged me a $1 surcharge if I was late on my bill. So guess what I did? I paid my electric bill four times a year, usually waiting until I got my final disconnect notice (eventually they'd cut you off). Saved me a bit of hassle, they didn't report to a credit agency, and $8 a year wasn't enough to get worked up about. In fact if they'd explicitly offered quarterly payment as an option for an $8 a year surcharge, I might have taken it. But if the penalty had been $50 or even $20 every month, I would have made damn sure to pay every bill on time. No one would pay hundreds more a year for the convenience of paying their bill only once a quarter! If there are no negative consequences for irresponsibility, even generally responsible people like me will sometimes be lazy. In this light, a $50 late fee isn't gouging, it's merely an incentive to pay your bill on time. Again, I'm not even saying that the banks aren't out to maximize their profits here, just that if you are smart you will learn very quickly to pay your bills on time!

Hey, the new penalty fees at upwards of $50 will apply to all consumers, the good and the bad.

I think you missed the point. By the time you're getting charged penalties, you're not a good customer anymore pretty much by definition, because you are far more statistically likely to miss future payments.

"So I was a few days late on one payment, why do I have to pay a late fee?" Well, when you sign a credit application you don't agree to make your monthly payments "within a few days after the due date" or for that matter "as long as you still have a job" or "if the car doesn't need an unexpected repair that month." Sure it'd be nice if banks cut you some slack sometimes (and some do, if you have a very good history with them), but to expect it, or to demand it, or even to legislate it, is foolhardy. If you are late once you're more likely to be late again, and the worse your payment history gets the more anxious the bank will become to get its money back. It's business, not a social club.

You cannot ever expect a business to care about you. They will care about you (or put on a reasonable simulation thereof) exactly as much as they need to in order to make a profit from you. This is not a bad thing, because the profit motive is the very reason we have access to all the frankly amazing products and services we have access to in our society. Once you understand that, you can approach credit (and all other aspects of finance and commerce) in a totally impersonal fashion. What are they willing to do for you and what do they expect of you in return? Do you want what they are offering enough to keep to your side of the bargain and to accept the consequences if you don't? On this level it is possible to have a satisfactory relationship with lenders. You get what you want, they get what they want, end of story.

Maybe a new way should be made available to establish credit history. As it stands, the only way to do so is opening oneself up to doing business with predatory and unethical entities.

No, you can apply for credit with pretty much any lender, not just the predatory and unethical ones.

I'm at a loss to understand what possible use a credit history that wasn't an actual history of one's credit would be to lenders, but I'll bite -- what did you have in mind? Maybe we could go back to the days when the bank would interview your friends and family to make sure you were of good moral character, attended church every Sunday, etc.? They really did do this once upon a time, you know.
posted by kindall at 12:39 AM on March 18, 2006

Sure, you could look at the world as full of eeeeeevil corporations who want to make you their slave.

Nope, that's not what I'm saying. I've consulted for some mighty fine corporations., IBM for instance has very high ethical standards in regards to how it treats it’s customers and it’s employee’s and their products are industry leaders in all areas.

But banks and credit card companies are not our friends. They're counting on people getting in trouble financially, alas are designing their credit products to do so.

I think we can both agree that most people need to save MUCH more than they do. Most financial planners agree that an important first step to financial freedom is having 6-12 months' worth of typical monthly expenses in an emergency fund.

Absolutely. And it's next to impossible to save when you're spending your money on massive finance charges and penalty fees.

15 days is thus 360 times the amount of time you need to decide whether to accept the new terms.

Right. But (and this is what they’re counting on). How long does it take for an average family to rearrange their finances so they’ll no longer rely on that potential source? It's utterly stupid to depend on your credit card (and insane to use one for cash advances), but a lot of people rely on them for aforementioned emergencies (Job loss, rent, medicine). It happens all the time to all sorts, not to mention the working poor and people who've lost their jobs or health insurance. I posit that credit card Co.'s and their armies of MBA's, (not to mention lobbyists) factor that into their formulae. I know it for a fact (and no I've never been in finance). The Credit card Companies and Banks have pulled a hat trick. They’ve taken a plentiful resource, (i.e., money) and made into a rare commodity that they can charge insane interest rates for. I mean look at where the interest rate for borrowing has been for the last few years. Borrowing money for those with good collateral has been insanely easy and cheap, ergo the real estate bubble that many have used to make a pretty penny and decimate neighborhoods. The working class have seen very little of that profit. Young folks haven’t been able to buy first, but the rich have certainly gotten richer off of flipping 2nd, 3rd and 4th houses. On top of which the banks have been able to keep Real Estate prices by valuing property at more then it’s worth. I’m seriously digressing here but stay with me for a second further, which is that these entities have also posited themselves to politicians as engines of economic growth vis a vis the easy access to credit cards and that any regulation to the industry will force them to tighten credit forcing a slowdown in the economy and the attendant bad poll numbers. If this doesn’t scare the bejesus out of you well it should…

By the time you're getting charged penalties, you're not a good customer anymore pretty much by definition, because you are far more statistically likely to miss future payments.

You know, that might be fine if it was a corrective to make up for lost profits, but it's not simply that anymore, penalty fees are now viewed as an expected fee customers should pay once in a while. I greatly doubt your utility Co. ever expectedly shut down/switched the online payment URL, changed the address to send your check to, or picked a Sunday to MAXIMIZE the number of people who get hit with a penalty fee?? No they don't, but credit card companies pull that all the time. Most people are too busy living their lives to get caught up in such petty shit so they just pay the fee and move on. So let's say Citibank has 100,000 customers (That's very conservative for examples sake) and you can count on 5% to pay late. So 5000 X $50 = $250,000. A quarter of a million dollars, because your lMBA's and obbyists wrapped up extra penalty fees. Now imagine you know that putting your due date on a weekend (or frigging leap year March 1st, the amount they made on that makes me my head spin), you can net another 3% of your customers with penalty fees. So add another $150, 000 to that initial automatic $250,000 and you don't think they have a team of people looking for the dates in the month that people are most financially vulnerable? Do the math. And as I said in an earlier post, these tactics are already beginning to pervade all the service industries, especially the telephone Co.’s (who seek to monopolize the internet by charging extra for surfing to certain sites or downloading sound and video files).

On this level it is possible to have a satisfactory relationship with lenders. You get what you want, they get what they want, end of story.

True, true but we're quickly becoming a culture that sees credit debt as the rule and not the exception and folks (especially kids starting out) have to keep in mind that they shouldn't get caught up in that lifestyle. People spend years in financial limbo (you and me, Kindall) trying to fix those problems. Time and emotional energy better spent on more important things. You know like dreams and goals. I mean, yeah some things you need and okay bite the bullet once in a while and use the credit for tools you need or to have some fun, but BE CAREFUL.

Maybe we could go back to the days when the bank would interview your friends and family to make sure you were of good moral character, attended church every Sunday, etc.? They really did do this once upon a time, you know.

The Banks and Credit Card Co's can have a very healthy existence even without the numerous hi-jinks enumerated above. It really comes down to playing the game offensively, strongly and with no illusions as to the deleterious personal effects of debt. The following definition from Ambrose Bierce’s “The Devil’s Dictionary” is a good one to keep in mind:

DEBT, n. An ingenious substitute for the chain and whip of the slave- driver.
posted by Skygazer at 10:24 AM on March 18, 2006