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.