The Credit Card Crossroad

I’m a guy who has managed credit card portfolios from almost the beginning - (well not really the beginning – I’m not THAT old for Pete’s sake). My beginning is from the mid-80 – when credit cards really started to take off. As such, I was very interested to listen to these reports about how the new administration wants to "protect credit card users."

We forget that the genesis of credit card usage was the early 80’s during that last real recession. S&L’s were crumbling, the real estate market was deteriorating and interest rates were at historic highs. The Prime Rate was in the 16-17% range. There was virtually no investor market for loans, so banks could only make money on the interest rate spread between what they paid in deposits and what they earned in loans. With deposit rates near the prime rate, they were few opportunities for banks to lend money unless borrowers were willing to borrow in the 20% range.

Congress made some sweeping changes to credit card regulations which allowed banks to offer credit cards on a more liberal basis. Remember, this is at a time when the technology didn’t support it very well. Does anyone else remember when merchants had to look in a paper book, issued weekly by the bank, to see if the credit card number being presented was good?

As technology improved and point-of-sale authorizations became electronic and easier for merchants, the acceptance of credit cards in our daily commerce grew and grew. And so did the profits. Managed appropriately, credit cards can be very profitable but it is a delicate balance which requires simple math. If the delinquencies grow and losses increase, the situation can be masked by increasing portfolio balances. This is because credit card issuers are evaluated on their percentage of losses against their total outstanding balances. The higher the losses, the more balances you need to keep the percentage the same. Simple math.

How do you increase portfolio balances? By increasing credit lines, lowering the credit standards, improving technologies to encourage more usage. Before long, an entire cultural shift occurred when credit cards became part of our daily buying habits and the collective debt levels increased. By the time the Internet arrived in the late 90’s, we were quite used to buying stuff with plastic and the prospect of using that plastic to buy stuff throughout the world using our own computer would propel us to the debt-ladened society we are today.

Along the way, the regulators and consumer advocates have attempted to “help” the consumer by requiring more credit card disclosures. The reason we now have the “fine print” disclosures is that the government has forced the credit card companies to increase the amount of disclosure information over the years. To now call them on the carpet and demand easier disclosures is a wee bit disingenuous in my view.

Regardless, I cannot argue that change is needed. But for me, the change needs to start at the fundamental cultural level – changing this buy now, pay later mentality. And of course, financial education remains the best defense while Congress, the regulators, and the credit card issuers all try figure out how to play nicely in the sandbox.

Do We Believe Yet?

After 10 years of preaching (or screaching depending on your prespective), it really stikes me these days how financial education is being promoted as essential for Americans to survive in the current economic climate. Chairman Ben Bernake said that we need to sharpen our financial skills - especially in the current economic crisis. Here's a recap of what he said today: http://www.msnbc.msn.com/id/30308921/


See, I actually believe that financial literacy is essential regardless of the economic climate. And, I think I have made the point in the past that financial education, though most likely would not have prevented this crisis, it certainly would have made it a tad bit softer. Which is why we continue to fight the fight to have personal finance a required course in schools.

Only 3 states in the United States have this requirement. Do we believe yet that the time has come? I actually think we may lose ground on this front. I'm reading all kinds of articles about school districts having to cut back on teaching staffs in order to meet budget requirements. Federal and state mandates restrict what teachers can do in the classroom. I get the circular - chicken vs. egg argument - but when do we reach the point when we as parents say that preparing our children to be financially savvy is better for them then knowing how to calculate a quadratic equation?

Playing the Game Means Keeping Score

One of the things I battle as part of the natural course of aging is staying aware of the speed of change. And with all things associated with getting older, speed keeps getting faster.

So too with the today’s world of credit. So here we are, in a fairly significant recession, and I’m thinking things will be like they were during the last significant recession in the early 90’s. Not so fast old man.

Today’s lending is credit score-driven. There has been too much investment in technologies and innovation to go back to the days of lenders considering the “character” of the old three “C’s of Credit.”

Nope – it’s all about the score. As people react to the recession by curtailing impulse buying and other spending, we need to be careful that our effort to cut spending doesn’t adversely affect our credit standing at the same time. To emphasize the different financial world we’re in these days, setting your credit cards aside and paying only with cash may be a great way to help rein in spending, but it can actually hurt your credit scores.

Read this interview of a pal, Liz Pulliam Weston, who is one of my favorite experts on credit scoring.http://www.msnbc.msn.com/id/30074146

In Case You Think I'm Way Off Base....

It's easy to be a town crier - "the sky is falling!" and all that. I've been saying that the job market will soon be turning evil for younger people and that an employers market will soon be upon us - just like when I graduated from college in the late '70's (egads - can it really be over 30 years?)

Anyway, that employers market helped to frame my generation into thinking that working 80 hours a week was necessary because in the beginning, if we didn't work them there would be a line of people waiting to take our jobs who would. As time went on, we thought the insane hours were leading to a first-class ticket up the career ladder.

Simultaneously, we gave our kids everything and rewarded them for everything. This is the generation that received a trophy for playing T-ball. It was all about making our kids feel good because we felt guilty for being away so much at work.

Now they're entering the workforce after going to college and racking up some serious debt. It's a rude reality and there is nothing we can do to take it away this time. Click on this segment from tonight's Nightly News with Brian Williams.

April 7: This year's college graduation class, the largest in American history, is entering the worst job market in modern history. NBC's Maria Menounos reports. http://www.msnbc.msn.com/id/3032619/vp/30095684#30095684

It's "I Can Save Week!" - Can You?

Last year, we decided that for the first time since our existence here in New Hampshire, we would develop an initiative for elementary school children. We call it, "I Can Save!" and this year we partnered with Fidelity Investments to tour various elementary schools throughout the Granite State.

We will be visiting second graders and after showing a brief presentation about needs & wants, we will be giving them Moonjar moneyboxes.

Winner of a 2004 Global Learning Initiative Award for Educational Excellence, each Moonjar consists of three moneyboxes (Spending, Saving, and Sharing), a family guide to get started, a passbook to record deposits and withdrawals, and a NH Jump$tart elastic band to hold the assembled boxes together.

I'm beginning to think that changes to the spending culture we now live in (which took almost 20 years to cultivate) can only be done with the next generation on consumers - today's elementary school children. Can they get us back to a lifestyle of not living beyond our means - saving money to buy stuff instead on buying now and hope to pay it back later - and an approach that focuses on the future rather than the present. Not sure - but that's what we're trying to do with the "I Can Save!" tour.

Saving - Spending - Sharing. Concepts we can all live by.