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15 Little Life Hacks

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:


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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  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.