An interesting story about credit card companies

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I’ve been trying to decide whether to invest in Capital One for a long time and, you know, looking strictly at the financials, it would have been a nice investment:

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They recruited heavily at Stanford, got some very good people, paid exquisitely well (I’m serious, a lot), and have a very analytical process for rolling out new products. Actually, I got my ass kicked in one of the interviews. The qualitative part was going well until the guy took out a notepad and said, “Ok, let’s do some numbers.” Have you ever seen two grown men in suits slaving over a math problem, with one of them saying to the other, “Um, I think that goes on the other side of the equals sign?”

Suffice it to say I didn’t go work there.

Anyway, I’ve thought about investing in Capital One for a long time.

But I don’t think I will. See, one of my friends is a professional speaker and he was invited to speak to a Very Large Credit Card Company (not Capital One) on a certain topic. Now my friend agreed to do the talk, only to have them send him some preparatory speaking materials a couple months later.

He told me what he found (paraphrased): “They make you feel empowered to spend, but beneath it all these guys basically want their customers to spend more, upgrade to the next plan, get a higher credit limit, and then spend more. And this is one of the credit companies that has a good public face. We all get fuzzy feelings when we think about them!”

I find that pretty distasteful from an ethical standpoint. You have the average American in thousands of dollars of credit card debt, and these companies simply want more.

Now, I hear Scott’s comment on my last post:

It’s ridiculous for creditors to recommend the minimum payment, but to offer it is just giving you an option to make a bad choice, which isn’t at all ridiculous. If you want to waste your money on interest payments in exchange for a little short-term benefit, it’s not Citibank’s job to stop you.

But frankly, when debt is so crushing to so many people, I think a little paternalism is in order. I know recently there was a government move to increase the minimum required payments for just this reason. Now, I’m not here to get into a political discussion, and I know that doing that has huge ramifications in so many ways. One of my friends, for example, could hardly pay her credit card bills before the mimimum was raised.

Anyway, what I’m saying is that I won’t be investing in credit-card companies for ethical reasons. Sure, they have to make money. And they’re doing a fine job of it. But when we don’t have financial literacy in this country, and people continue to make horribly bad financial decisions (like paying only the minimum because the credit-card company doesn’t explicitly show how much that will cost you), I’m not into that. Sorry for the soapbox post but I can’t help but feel turned off by this kind of stuff.

[Update]: Great comments on this post. For the people who said, “But Ramit, credit card companies are just trying to make money,” sorry but I don’t buy it. That’s a lame excuse to do lots of very bad things. And as we’ve seen in tons of businesses, you can do good while making lots of money.

And whenever people write, “Where do you draw the line?” I get confused. I told you, I draw the line right here!! Anyway, the comments did help me sharpen my thinking and there are some excellent points made. Check out the comments.

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33 Comments

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  1. Wow. If you are a quant freak in the social sciences, this is a beautiful post in so many ways. Nicely said.

  2. From a noble, chest-swelling, power-to-the-people point of view, this is an inspiring sentiment.

    Until you realize that it implies that the population at large is unable to realize, independently, that paying the minimum is bad for their finances.

    Not only is this obvious if you do the math, you don’t even have to do the math. Countless articles, news shows, and pundits have done it for you and repeated this sentiment over and over again.

    I don’t disagree that credit card companies have some slimy tactics – including deluging college students (newly independent and delirious drunk on their freedom to spend) with cards. But damn, personal responsibility is at an all time low in this country. If credit card companies are responsible for people’s debt, is Absolut Vodka responsible for alchoholism? Is McDonalds responsible for obesity?

    That said, it’s still a noble thought, and in some ways I wish I could agree.

  3. I don’t know if it’s that inspiring. I agree, most people don’t behave rationally (or intelligently) when it comes to money matters. After all, it makes sense to feel a little pain now than a LOT of pain later, rationally speaking–so why not pay it off in full?

    I hear what you’re saying about personal responsibility. I’m trying to find the balance between that and the lack of financial education we have. I see your point about people shouting it at us everywhere…at a certain point, shouldn’t we listen? But then you get idiots on TV/radio who tell people “BUY THE HOTTEST STOCK NOW!!!!!!!” and “PUT 20% IN GOLD!!!!!!!!!!” and I guess it’s not that surprising.

  4. personal responsibility is at an all time low in this country. If credit card companies are responsible for people’s debt, is Absolut Vodka responsible for alchoholism? Is McDonalds responsible for obesity?

    Actually, yes these organizations are partially responsible. Or, to be more accurate, advertising by these organizations is responsible.

    Nobody can deny that ultimately all choices come down to personal responsibility. But what many people fail to realize is that advertising is a highly refined psychological science designed to circumvent personal responsibility. Advertising agencies are damn good at what they do. Don’t believe me? Look at the problems we face with alcoholism, obesity, and debt.

    Too many people are willing to give large corporations — especially banks and credit card companies — a free ride, citing the ultimate responsibility of the individual. They have a point, but only a small one.

    This is a fantastic post. Thank you, Ramit.

  5. Ah, the irrational exuberance of the masses. Good point. We do have a lot of dumb experts eager to lead people astray.

  6. Ramit, you hit the nail on the head.

    “Vote with your feet.”

  7. The research on game theory and decision making blows the whole idea of personal (financial) responsibility out of the water. A lot of times, it is pretty easy to lead people to a seemingly rational decision where the statistics work against them and the house gains a huge advantage.

    Money magazine recently featured a some sort of math-slanted “reflective intelligence” test that sort of gets at a person’s ability to see past seemingly rational leads. The makers of the test wanted to use it to screen out potential financial advisors out of a pool of students. However, the pass rates of students, even at MIT, were extremely low. I think this shows that there are still huge gaps in the ability of, even very bright, human beings to make advantageous decisions in the presence attractive decoys. Often it may be a human cognitive capacity question, not a moral, personal responsibility one.

    And that’s why I think this is a beautiful post.

  8. First time poster, long time reader here.

    First off, I agree with Rachel – noble thought, but ultimately the consumer is (and should be) responsible for his/her own spending habits. If a consumer needs to use a credit card to buy groceries (not restaurant) or gas to get to work (not to the beach), sympathy abounds.

    That said, one should take a cold hard look in the mirror if they use credit cards to survive and are approaching the average consumer debt carried in this country. I read a study last year that looked at credit card debt and attempted to separate luxury spending from basic spending. Big surprise – a sizable chunk of the debt was for big screen TVs and trips to Bermuda. Credit card companies should not police these types of purchases, and while I am sympathetic to your concern about investing in Capital One, I don’t think it is wise to inject too many qualitative judgements into your stock choices.

    If you had invested 1,000 in Capital one, you would be able to pick up a nice return, which you can then donate to a worthy cause if you see fit. To me, this is a better strategy than denying yourself a lucrative opportunity.

  9. I don’t know if you’ve heard this but Capital One, and the less ethical card companies, can actually ruin your credit for you.

    Here’s what they do:

    You card limit is, say, $1000 for simplicity. The largest balance you’ve ever had on the card is $250. Your current balance is $200.

    Most cards companies would place your % of card balance at 20% ($200/$1000).

    Capital ones calculates your % of card balance at 80% ($200/$250) because it’s the “most you have allowed yourself”. The ONLY way to “fix” this is to at sometime have actually maxed out your card.

    Why do they do this? It makes your credit worse and therefore less attractive to OTHER card companies. What a wonderful way to keep a customer.

  10. Jennifer, do you know the title or have the link to that Money Magazine quiz? I’d like to give it a try.

  11. when you start to add McD’s, the Absolut Vodka makers, and presumably their advertising companies (and the media co’s that carry them?) to your list of companies you won’t invest in, you start to get a fairly short list

  12. I couldn’t disagree more. While I empathize with your argument, the credit card companies are not doing anything wrong. It’s not as if they suddenly pop the fees on their clients; such things are CLEARLY documented. Caveat emptor is a famous phrase for a very good reason. If consumers are incompetent, they need to be educated. You cannot unfairly lay blame — or, as you seem to imply, responsibility for education — on the credit card company.

  13. I have a Capital One credit card, but I don’t use it. I have a very high rate on it, as it was a student card back from before I even graduated high school. I could close it, but that’s going to ding my credit rating for now. I could negotiate a better rate, but I don’t *want* incentives to use it.

    I think in some ways, money is like food. Humans aren’t really designed to cope with readily available food, and as a result quickly begin to overeat. Expecting people to be purely responsible is negating the fact that nature makes it very difficult. Some responsibility would be nice, from the corporations working to make this cheap, readily available food desirable so they can increase their bottom lines.

    The same is true for credit card companies. increasing their bottom line is what they’re there for – they’re not financial cooperatives. However, increasing it at at detriment to society, is not what they are around for.

    They need responsibility to provide an enabling service for customers without luring them into making mistakes that our society doesn’t correct ingrain into them. There’s a medium here. If there wasn’t, I wouldn’t be part of a growing co-op bank. That is, I wouldn’t be part of it, and it wouldn’t be growing.

  14. I used to work in collections for one of the current top 5 banks by size. I worked mostly with car loans and home loans and the tactics used by the bank to collect, and the things it turned a blind eye to, were ridiculous. If you received a complaint about a dealer’s loan tactics (such as straight out lying on the paperwork or about the interest rate) the bank had no system to log these complaints and investigate them. Wouldn’t you want to know if you were doing business with a shady dealer? I would. The bank didn’t because who cares as long as the person is making their payments.

    Another example is the things the banks would have us tell customers to get payments. The favorite was the per diem interest. This was the amount of interest you were being charged per day. It varied depending on your principal and rate, and could get as high as $30 or more a day. I refused to do this because I knew what we were telling them was bullshit, but we would lead them to believe that if they made their payment, they would quit accruing that dollar amount of interest. “You’re currently being charged $30 a day interest. If you make you’re payment, that will stop.” Now, it is true, because when your principal drops, the interest you’re charged is going to change, so it isn’t going to be $30. BUT it’s not going to be a whole hell of a lot of less. Say you make a $300 payment on a $10,000 loan and half of it went to the principal. Now you owe $9850. Simple math tells you that the interest you accrue is going to be pretty close to what you were accruing before the payment. The bank however would lead the collectors to believe otherwise, who would in turn lead the customer to believe otherwise.

    All of this reinforces the point that the bank does have a responsibility to educate its employees and customers. There were multiple times when I had to explain the concept of compound interest to someone who had a $3000 final payment for a dodge neon. They had made all their previous payments they would say, so they should only have one for $200 left. Yeah, that’s if you paid them all on time so your loan follows its amortization schedule set by the bank. If you pay late all the time, you accrue interest that isn’t factored into your original payment schedule, so you’re going to owe more. I had to come to this conclusion myself also, because during the hours upon hours of training I had, nobody ever mentioned why some people had a $800 or $3000 final payment. Unfortunately, over the 5 years (on average) these people had these loans, nobody would tell them that until I talked to them and had to explain the $3000 balloon at the end. Most of my coworkers couldn’t explain it to them either, because the concept escaped them, or they just wanted to collect money and keep their job, or the usual reason was it wasn’t an issue at the time. They only owed $200 and that’s all they were going to collect, so why warn them about what as going to happen? That would take time away from making other calls to hit your goals. The bank is at fault when it plays on people’s ignorance to rip them off. And creates an enviroment where its employees are encouraged to give as little information as possible until a lawyer gets involved. Did I ever get a good job for educating people? No. Did I get a bonus when I was in the top 10 in dollars collected, as long as what I did to collect them was in its sparse guidelines? Yes. The bank is not innocent.

  15. Rammit,

    I see what you are saying. However, where do you draw the line? Banks have been doing the same thing with mortgages. They entice people to buy more home than they can afford. Then they send our refinance letters over and over again, so that people will borrow more.

    The fact of the matter is that a credit card company’s goal is to make money. Just like it is a car salesman’s goal to make money, or a real estate agesnt’s goal to make money. It is up to the CUSTOMER to decide whether or not they should borrow more money.

  16. Where do you draw the line on what you’ll invest in for ethical reasons?

    I recently invested in Vanguard’s 500 Index Fund because I am hoping that it will bring a good return for my retirement. However, when researching the holdings of the fund, I realized that the largest holding is in ExxonMobil, a company which has in the recent past gouged us mercilessly with astronomical gas prices — prices which have turned into multi-billion dollar profits. Now where do I stand? Am I part of the problem or the solution?

    The ethical dilemma is real, but my retirement is only getting closer. The same could be said of Capital One’s unscrupulous practices. There’s definitely a line of business ethics which a company can cross, and each investor needs to make their own decision on what’s more important to them. I personally think that you shouldn’t invest in an unethical company whose practices directly affect you personally. For example, if you’re a baby seal, don’t invest in Baby Seal Assassins, Inc. If I decide not to invest in ExxonMobil because I disagree with their practices, and I continue to drive, I feel like I’d be putting myself at a disadvantage.

  17. Very nice Ramit.

    I thought ‘making money’ was done in DC.

    Credit card companies certainly aren’t making money. They’re taking money. And the money they take represents all of these people craving things they do not need and don’t have the money to pay for.

    Money is just a concept. It is nothing without people. Shopping for some people is a very real addiction. They literally get a high from doing it.

    I think a drug dealer could easily think ‘hey, everyone has to ‘make money right? If they want to give me theirs because of their own self-destructive behavior, sucks for them…’

    Of course it can be rationalized by blaming the addicts for having the problem because then they don’t have to confront themselves. They don’t have to open their eyes to the fact that they are a major component in destroying other people’s lives.

    I’d like to see more posts like this Ramit. Explain to us what rich really means.

    Does having $1 billion dollars make you rich if 1 million people hurt themselves or died to give it to you?

  18. Perhaps rather than legislating minimum payments, another good idea would be to force credit card companies to attach two simple figures to the bill: 1) The # of days it would take to pay the full balance if only the minimum due was paid and 2) the total amount of interest that would be paid by doing so.

  19. The company that gives you a 150.00 credit line and then charge 79.00 to use it ought to be put in jail

  20. I used to be a postal worker, back in the days where Capital One was advertising _very_ heavily on TV that it did not telemarket, and so I got to see all the scummy little tricks they’d use to make sure people were opening up _their_ credit card offers while tossing the others away.

    I’ve seen ones that look like checks, serious legal paperwork, and handwritten letters. I’ve seen ones proclaiming “We’re the company that celebrates your black heritage!” going to everyone in that neighborhood.. and they weren’t donating 1% to the NAACP, they just stamped on a cheap picture of a southern church or a basketball hoop. That last one was probably the scummiest in the “get a picture of your hobby on your card” ‘feature’ the industry introduced.

    Capital One was also the first to start sending completely opaque, unlabeled envelopes with a blank plastic card inside.. because if someone has sent you a card, you can’t just throw it away.. it could be a replacement card from a responsible company.

    At one point, credit card offers being sent out or being returned were at least 30% of our volume… our volume in this case not being all mail, but mail whose address the computer couldn’t resolve.. meaning that Capital One and several other companies were spending a LOT of money continually mailing to addresses that didn’t even exist, rather than try to clean up their mailing lists.

    Anyway, Ramit, I, too, appreciate this post. There is such a thing as ethical investing, and I’d rather put my money where it’ll do less harm on the way to making me a profit.

    Of course, I’m also someone who went deeply into debt and needed a column like this years ago, so I have lots of other reasons to hate credit card companies.

  21. Ramit,

    Great post. I’ve also struggled with this question. I view it this way. Since I finally became free from being a slave to debt, it seems a little slimy to make money off of the slavery of others.

  22. Ramit,

    You probably need to short them and put more time to teach other people how to behave with money and credit cards. This way you’ll win twice!

  23. This is an honest (non-rhetorical) question: How does this jibe with the adage of the “we’re going to teach you about money” intelligencia in that you should divorce emotion from maters of money? By saying you’re not going invest in particular corporation for ethical reasons, are you not limiting your own financial growth by bring emotion into the equation?

    I guess there is value in being able to sleep at night. Plus I suppose this isn’t a cut or dry situation (i.e. not investing in the Soylent Corporation after finding out Soylent Green was made from people is an easy one. Not investing in some company since they outsource jobs in your community out of the county might seem short sighted.) Just curious on your take.

  24. I’ve been thinking about my post on this thread last week, and wanted to elaborate on my (and other) points.

    I do not think it is wise to inject ethics into investments. Yet I am an ethical person who is very philanthropic and hopes to become even more philanthropic as my career grows. I used to try to invest in companies that I found ethically responsible, but stopped after I realized two things:

    First, the returns on my investments were really suffering.

    More importantly, though, I realized that even if I were a millionaire, the amount of money I would invest in a single company wouldn’t have much of an impact on it’s bottom line, yet the profits to me could be significant enough to be worthwhile.

    Thus, I spend my time worrying about the bottom line as opposed to the way they make their money.

  25. Here’s an even more interesting credit card company thing.

    My partner just received a letter, forwarded from his old address, from Capital One. This letter was really a book of purchase checks, those infuriating things that credit card companies shower their cardholders with, and which must be destroyed faithfully lest someone else get ahold of them in the garbage.

    One problem: he doesn’t have a Capital One credit card. Or a Capital One account of any kind. Or any kind of credit.

    So, is it some sort of new trick to get people to sign up? Are they real checks for a real line of credit? Is it just a mistake on the report? Or is it an evil horrible conspiracy to take our hard-earned money? Spooooky.

  26. Where to draw the line, indeed. I think each investor has their own lines and their own ethical concerns. Personally, I would never invest in McDs, but Absolut sounds like a grand idea if the numbers are right. (I work in advertising, I’m used to getting beat up, but I won’t even start the defensive soap box!) I think Ramit has brought up another good cause.

    But just like politics and religion, everyone will have their own views and make their own decisions. Otherwise, the stock market would never function, would it?

  27. The test was actually featured in Smart Money. It’s called the Cognitive Reflection Test. I believe the researcher’s name was Fredrick or Fredrickson at the MIT Sloan School. If psycho-finance is your thing, I’d just google the guy and read his scholarly paper. I believe Thaler at the University of Chicago is a big name in game theory and decision making biases. You should have no problem finding his scholarly work as he has his own investment firm.

  28. I used to work for Capital One. Very solid company, with extremely robust decision-making processes. I work for a competitor now, but still believe that they’ll always be one of the best performers, and would invest in them over any other card companies.

    The talk of printing “it would take you 267 bajillion years to pay off your debt if you only paid the minimum every month” on statements is silly. If you actually saw the data on how many people pay just the minimum every month, you’d see that almost no one is in that situation. People pay the minimum due for 2-6 month stretches at most. Only the few who are really REALLY over their heads pay only the minimum due for a year straight, and those guys are few and far between. It makes for a nice soundbite, but it doesn’t really reflect reality.

    And yes, weren’t the capital one interviews a blast? I really enjoy case interviews, so it was fun for me. On-campus was a case interview, analytics test, and psych test. Final rounds were 3 case interviews and 2 behavioral interviews on-site.

  29. I’m glad you decided not to invest because of your own ethics. Money makes the world go ’round, so think of how different things would be if people used their ethics to decide what to buy, not decide their ethics based on what they buy.

  30. I’m the only one among my group of friends and acquaintances in college who graduated with no credit card debt. Everybody else I knew maxed out and paid the minimum.

    One friend reasoned with me that credit card companies don’t like it if you stay paid up and don’t carry a balance, so you should always have several recurring charges that you don’t pay off.

    Whiskey Tango Foxtrot?

    This stupidity earned him my famous lecture: They exist to serve me, I do not exist to serve them! I have better things to do with my money than enrich credit card companies by voluntarily paying interest and late charges — like just about any other use.
    This post and the comments make me wonder if my friend perhaps got his disinformation through a credit card company originally.

  31. Excellent post.
    for Adam from Capital one:
    you are either lying or blind to what these companies do. Debt is evil, read the bible.

    for everyone else who hates debt, and wants to know the truth about slimeball companies like Capital One::
    http://www.daveramsey.com

  32. Think about this hypothetical situation: You can either get paid four dollars to help a blind lady cross a street, or you can get paid five dollars to try to trip the lady when she attempts to cross on her own.

    I would hope most people of even temperament would agree that the extra dollar of return isn’t worth the moral cost.

    The same applies here, although the color may be more gray to some. Choosing not to invest in Capital One (or any company one has a moral issue with) does not mean you cannot make money. It simply means than you’ll choose another vehicle for your venture, and perhaps the return may not be quite so high.

    Or perhaps the more moral path may pay longer in the long run. Either way, investing with an eye to ethics as well as finances should be applauded.

  33. I’ve got a Capital One card and I’ve noticed that they offer a relatively low credit limit. I ordered it at http://www.credit-land.com/1030/1030_page_4248_4637.php They are also not in the habit of constantly increasing your limit as a number of others do.