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A fundamental shift

A fundamental shift

The New York Times posted an article called Given a Shovel, Americans Dig Deeper Into Debt recently. It describes the story of how one woman got into debt, along with some of the changes to the lending industry over the years.

This change in particular was shocking:

“But behind the big increase in consumer debt is a major shift in the way lenders approach their business. In earlier years, actually being repaid by borrowers was crucial to lenders. Now, because so much consumer debt is packaged into securities and sold to investors, repayment of the loans takes on less importance to those lenders than the fees and charges generated when loans are made.”

The idea that a lender might not even CARE about whether or not a borrower had the ability to repay them was almost unbelievable. Going from a business model where money is lent at a reasonable rate with the expectation of being repaid, to one where money is lent with as many fees as possible with the expectation of quick profit and zero long-term responsibility or consideration of repayment is a fundamental shift. Sadly, corporations often mimic the worst traits and tendencies of humans. Short-term thinking typically produces short-term results and long-term disasters.

MasterCharge sign
(Photo by Roadsidepictures)

Another powerful change to the credit industry has been more subtle: removing the stigma of using a credit card. (Some of you might be thinking “what stigma?” right about now, which only goes to show that the campaign has been successful.)

“Eliminating negative feelings about indebtedness was the idea behind MasterCard’s ‘Priceless’ campaign, the work of McCann-Erickson Worldwide Advertising, which came out in 1997.

I remember one particular childhood shopping trip with my mom. We were in a department store, and she wanted to buy something for the house we’d recently moved to.

“How would you like to pay for that?” asked the clerk.

I could barely hear my mom’s answer. “MasterCharge,” she said, as she pulled the card out of her billfold.

“What’s MasterCharge?” I piped up. “It sounds like an animal. Why don’t you just write a check?”

She explained that you needed to have money in the bank to write a check, and that MasterCharge was a way to pay for things later.

That made an impression on me. No money in the bank? Ow. Were we ok? Plus she clearly felt uncomfortable about using it.

Of course, MasterCharge is now MasterCard, which has morphed (if you believe the advertising) into an accepted way to get the good things in life. Other credit card companies have cashed in on the metamorphosis too, turning credit into the appearance of something elite and exclusive. There are gold cards, platinum cards, mysterious black cards, and more.

Me, I imagine that people must think I can’t afford the things I’m buying when I use my DEBIT card (or my American Express) to buy something. I think a little stigma can be a good thing in this instance.

View Comments (5)
  • The line about lenders not being concerned about repayment but more about the fees they could collect jumped out at me too.

    There was also a line in there somewhere about lawmakers considering plans to make lenders only loan to people whom they actually expected to be able to repay the loan- I was blown away by that! But I guess it makes perfect sense given what we have seen with the subprime mess and whatnot. It’s clearly an industry out of control.

  • Well, if you make the interest rate high enough, you can make a profit as long as the borrower pays back for long enough anyway.

    Business exist primarily for short term returns these days and banks are no exception. Shareholders don’t necessarily care whoat the model is for making money, as long as they continue to make money. It leaves me glad that I’m not one to carry a balance on my credit card.

  • The stigma that you mentioned is interesting. I was one of those who said, “What stigma?”

    I was raised by young parents who had NO money until I was in my teens, but they used credit cards. Mom paid them off every month, and always told me that if you don’t pay them off, you are getting yourself into big trouble. So in my world, I just assumed everyone paid them off every month and it never would have occurred to me that people didn’t. I (obviously) found out later that most people revolve balanced, but by the time I learned that, the stigma was already gone.

  • I still feel a little stigma when it comes to credit cards. I recently switched from using my debit card to a card that gets cash back. I want to explain to every cashier that I’m using a credit card because I get cash back.

  • It’s a well-known principle of managment that people do what they’re measured on and rewarded for. If a bank is paid a fee to loan a certain amount of money that belongs to someone else, all they care about is loaning that money – as long as the contract they’re working under doesn’t mention anything else why would they care?

    On the other hand, one group of people who should care is the investors who come up with the money; they definitely won’t end up with as much as they thought (and they probably thought they were getting much higher returns with no extra risk). There’s a few lessons here but it’s really all common sense.

    What I would say is the biggest change is that you really need to decide on your own if you can afford to borrow the money that’s available to you.

    When it comes to credit cards, I use mine for everything I can to get reward points. I’m sure some people wonder about it but let them imagine anything they want – I have a constant stream of money going in to keep the balance low and avoid interest.

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