Rachel

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.

J.D.

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.

Gomek

Ramit, you hit the nail on the head.

“Vote with your feet.”

Howie

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.

Gary Markhov

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

Sahil

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.

Carlin

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.

Mateja

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.

Freelove

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.

Pronell

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.

Alex Givant

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!

Howie

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.

DC Grrl

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?

Adam

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.

JBA

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.

Dylan

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.