The Philosophy Of Credit Cards

Usury - 1) The practice of lending money and charging the borrower interest, especially at an exorbitant or illegally high rate. 2) An excessive or illegally high rate of interest charged on borrowed money. 3) Archaic. Interest charged or paid on a loan.” – Dictionary.com

“Usury - 2) In law, the crime of charging an unlawfully high rate of interest. In Old English law, the taking of any compensation whatsoever was termed usury. With the expansion of trade in the 13th century, the demand for credit increased, necessitating a modification in the definition of the term. In 1545 England fixed a legal maximum interest, a practice later followed by other Western nations.” –Encyclopedia Britannica online

I remember during my student years in the mid-eighties, I applied and received my first credit card. I was pleasantly surprised as most of my friends who also were students were refused. At the time, I was intermittently unemployed and had, at the most, a part time job. The interest on the credit card was eight per cent and the maximum allowable borrowing on the card was $500.00. The maximum monthly payment if the card was used to its limit was a paltry sum (approximately $15.00 if I remember correctly).

The eight per cent charge was the norm on credit cards at the time (it was not an introductory rate). The $500.00 was a reasonable amount as, in a pinch, the amount could be paid over a few months even with a limited amount of income. All in all, it was a good deal for both the credit card company and myself as they received interest on the debt and I had a way of paying for things without carrying a large amount of cash (debit cards were yet to be in wide spread use).

After I finished school, I paid up the credit card. Shortly afterward, I stopped using it as my debit card (the use of debit cards were in more use by this time) was useful without an eight per cent charge. Overall, the use of this credit card was a pleasant experience.

Now let’s move up to the present day. Students are still a main target for the credit card companies. But an interest rate of eight per cent is long gone. The standard rate for a credit card these days hovers at 18-20 per cent mark. The paltry amount of $500.00 as a limit has also met its death as most cards given to students have maximums in the lower thousands of dollars. The exclusivity of owning a credit card has also passed into history as very few students are turned down.

What has happened in the last 20 years that has changed the behaviour of all the credit card companies? Have they adopted a new philosophy? What has made them increase the amount of interest charged, increase the maximum borrowing amount, and increase the ease in receiving one?

Without having the ability to interview the decision makers in the banking and credit industry, and assuming that multi-billion dollar companies have money to spend on market research and how to gain monetarily from the typical behaviour of each demographic group in society, I have to assume the following:

The credit card companies earn more money by being less stringent on who they give credit cards to. The companies have crunched the numbers and have concluded that lending money to many people at a high interest rate will make them more money than lending fewer people money at a low interest rate even if they take into account the larger number of people who will default on the loan (bankruptcy being the most popular avoidance action).

Does this mean that there are no low interest credit cards out there? No, there are interest bearing credit cards that have a rate of less than eight per cent, but they are given only to those in the higher income brackets that have a very good credit rating (they are usually called a platinum card). The target group for the high interest credit cards are students and low income earners. The higher interest rate is justified, in the company’s mind, by the higher number of people who default. But these actions beg a question, why lend money through the use of a credit card to a poor student in the first place? Why charge him a high interest rate and give him a maximum limit in the thousands of dollars? It must be that the companies earn more money in this way.

Credit Cards - Page 2

Article by:
FS Staff

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