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Credit Card And It'S Effect.

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Autor:  anton  23 November 2010
Tags:  Credit,  Effect
Words: 3071   |   Pages: 13
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History of the Credit Card

The route of credit card begins around 1914. It was introduced from company such as Western Union and other department stores, hotels, and oil companies. At that time, the card can only purchases goods and services from the issuer and the full amount must also be repaid upon the due date. The first “general-purpose” charge card was not introduced until 1950. It was the Diner’s Club who initiated; however, it was not until the late 50s when the banks entered the credit card industry and revolutionized it by allowing balances to be carried over from month to month.

For more than a decade, the credit card industry was growing at a very slow rate, largely due to the fact that only local bank cards were accepted by the merchants. The national system to process credit card transactions developed at 1966 when Bank of America began to license its BankAmericard credit card logo to the other banks. The system however becomes a chaos at the late 60s as the franchisees’ attempts to undercut competitors by the means of cheating. In 1970, Dee Hock convinced Bank of America to separate its banking division from the BankAmericard system to resolve the issue and transformed it to what is now known as the Visa payment network. Other group of banks followed and formed the MasterCard association.

Regulations of the Credit Card Industry

Although the development of Visa and MasterCard associations was recognized by the merchants nationwide, different usury laws across the states set back the potential benefits of the system. Some states set the usury ceilings considerately low in compare to other states making it less appeal for issuers to lend loans in this states. In addition, the interpretation of the federal law at the time regulated the lender to charge no more than the usury ceiling where the borrower resides. This increases the legal burden cost the issuers have to bear also.

Combined with the complexity and the highly regulated usury law across the states, the issuers’ profit margins were much bounded. Limited profitability causes the lenders to be especially cautious to extend the credit to the higher risk borrowers. In a regime of restrictive usury ceilings, where the lenders’ income potential was limited, lenders extend credit only to higher quality borrowers, and poorer quality borrower were shut out of the market. This situation resulted in less credit availability and lower charge-offs. The credit availability continued to be rigorous throughout the 70s as high nominal interest rate were introduced by the Federal Reserve to counter off the high inflations. This made the issue of scarce credit availability even more visible.

Deregulations of the Usury Law

The interpretation of the usury law was changed by the Supreme Court in 1978 with the case of Marquette National Bank of Minneapolis v. First Omaha Service Corp.

It is based on the Minnesota solicitor general who tried to prevent First Omaha from exporting Nebraska’s higher interest rates into Minnesota. The general believes that the permission of exporting higher interest rates will distort the effectiveness of the state usury law. However, the court adopted the section 85 of the National Bank Act and stated that the usury issue should be a legislative matter. Hence allowed the lender to charge the highest interest rate based on where they reside instead of the borrowers.

This decision resulted changes of usury ceilings across states and redistribution of lending to certain states. Although some states refused to attract banks and consumer lenders to immigrate by the means of deregulating interest rate. However, two states, South Dakota and Delaware took the opportunities to boost their employment rates and attract more capitals. Citi Bank, who was struggling to stay alive with the usury ceiling of 12% at New York seized the benefits of this movement and immigrated to South Dakota. With the new usury law at South Dakota, Citi Bank was able to charge as high as 20% on consumer loans across the nation. Many other banks followed the movements and by June 1997, 43% of the credit card and consumer loans institutions are located at Delaware, the largest credit card volume of any state.

The decision of Marquette further led to a drastic increase of credit card lending. According to the Federal Reserve Survey of Consumer Finances, the percentage of households with at least one credit card account grew from 38 percent in 1977 to 43 percent in 1983 to 54 percent in 1989 (GAO, 1994, 13). Credit card loans also become the most profitable bank division, earning approximately 30 billion dollar profits.

Issue of the Bank Marketing

The deregulation of usury law has also trigger the credit card war across the banks. The high profitability induces banks to enlarge their credit card divisions and compete for the volumes of the customers. Almost all the banks that possess a credit card division have come up some means of benefits to help promoting their cards. For example, American Express promoted their card through air mile points based on the amount of the dollars cardholders spent each transaction. They also has card like the Hilton Card which target the frequent business travelers. Other banks allure their customer through cash back, points reward etc.

Telephone, mailing and media soliciting were also used as the key marketing tools to sell credit cards. According to the published reports, credit card solicitations industry-wide have hit record levels with 881 million solicitations mailed in the second quarter of 1997. Stephen Brobeck, executive director of the Consumer Federation of America, estimate 2.8 billion pieces of mail were sent by the industry in 1997. Besides the regular mailbox bombs, stacks of broachers reside next to the cash registering in the stores and of course the constant plays of the popular TV commercial of “For everything else there is Visa.” Hundreds of millions of telephone solicitations and advertisement are spent each year by the industry. For consumers, it has become impossible to avoid daily attacks from credit card advertisement anymore.

Many economists and social scientists now raise the business ethics questions about banks aggressive marketing scheme. According to the statistic, majority of the soliciting mails are tossed away from the customers. “For every 1,000 pre-solicitations (of Visa and MasterCard), 23 are returned and fewer are approved.” said David Sandor, vice president of Visa USA. This may be an economic loss as the industry allocates the society’s resource inefficiently. Many believe that instead of allocating the resources into waste, the industry should reallocate to a better investment such as money managements educations to their customers.

Moreover, company such as Visa adopts media or other networks to promote audiences to spend more and hence go into debts with the possibility of bankruptcy are one of the main concerns. Leverage profits by issuing high risk borrowers or low income group also become an issue over the years. In addition, other controversial issues about targeting college students or minor who has less self-disciplined also become the poplar questions the scholars raised.

Ethic Question about Targeting Low Income and High Risk Group

In spite of the all time high bankruptcies rates and delinquency, credit card issuers continue to search for new credit card customers aggressively. This is mainly because the diminish profitability rate the industry has been facing. Alan Radding from American Banker reports that “this competitive pressure has forced issuers to shave interest rates, make increasingly attractive introductory offers, and expand their search for more customers into the margins of credit worthiness.” The competitive environment pushes the banks to further expend their market by lending to either the marginal high-risk borrowers or low credit scores borrowers.

The effort to maintain profits through volume is showed by the growth rate of the lowest income brackets in the credit card market. According to the Federal Reserve board survey of Consumer Finances, the fastest growth in the credit card market has been at the lowest income brackets. The studies found that from 1983 to 1995, percentage of low-income families (those with incomes below the poverty line) with at least one credit card more than doubled, and the average credit card balance held by those families nearly doubled from $780 to $1380 (in 1995 dollars). The ratios escalate through out the years and the credit card debt generated by lower-income families grows at a faster rate then the overall consumer debts. The statistic indicates that poorer households are now more accessible to credits than before.

Some people argue that the issue of debt should be blamed on the borrower rather than the lender. They believe the lack of self-control from the borrower has led to the excessive debts. However, the recent study has discovered that many American families have adopted credit card debt because they use credit card to bridge their gap during the month. Hence, at the event of sickness, death, divorce, and job loses, they tend to fail to fulfill the payment on time. This further increase their interest rate charges, leading to more debts and charges like over-limit fees and the eventual route of bankruptcy.

Many consumers complaint that even thought they have recently defaulted their payments, the solicitation from the credit card companies never cease. The lenient standards of obtaining credit card are now blamed for the high rates of credit card delinquency and bankruptcy. This unethical practice of lending to the borrowers more than they can repay is now widely criticized by both the public and the Congress.

Ethical questions about targeting college students

Over the years, credit card issuers targeting college students have also been public criticized. According to the Federal Reserve’s Survey of Consumer Finances, consumers ages 18 to 24 spend one-third of their income on debt where as individuals ages 25 to 34 spend one-fourth of their income on debt. Moreover, credit card debt among young adults ages 18 to 24 has increased to $2985, a 104% increases over the 10-year period ended in 2001. This statistic raised the ethical question about the credit card industry’s behavior.

The credit card issuers explain the motivation of issuing young adult is largely due to the intensive competitions among the industry. They believe that through this process, they will find lifelong customers earlier. Future business relationship will be build through these students.

On the other hand, college students in general have lack of knowledge in regarding to credit card debts. They tend to be more naпve and less self-disciplined. They also have deficient idea about their ability to pay of the credit card debt. A common misconception among the college students is that after graduation, the debt will be paid off easily. However, they did not foresee all other obligations upon graduation. For example, student loans, rents or mortgage, and car loans are the major expenses student run into after finishing college. With the entry salaries most of the student receives, all this payment can potentially become too much of burden to bear. “Visa USA found that in 1996, 8.7 percent of people filing for bankruptcy were younger than age 25 (Souccar, 1998.)” This disturbing results increase the remonstrations against credit card issuers marketing college students.

Recently, more and more colleges have banned the credit card advertisements on campus. “According to the United Marketing Services Corporation, 166 colleges stopped allowing credit card companies to set up tables on campus in 1998. This number is expected to increase to 300 to 400 colleges by 2003 (Toloken, 1999).” Others colleges has response to the ethic issues by either limiting the number of days the companies may stay on campus or increases the charges to turn away some companies.

Clearly, although the initiation of introducing credit card to the college students was based on the idea of developing a better relationship for future growth, this however is destructed by the increasing number of bankruptcy declared from the fresh graduates. The industry needs to reconsider alternatives marketing strategies on the college students to create a positive relationship with the students that will continue after graduation.

Possible Solutions

The invention of credit card has modified the modern method of consumptions. It has also changed the consumption attitudes among the general publics. The industry, congress, and the public have come up different solutions to alternate the inefficiencies brought by the credit card. One of the approaches is to correct the consumer’s attitudes towards debts and bankruptcy. Through the recently reformed bankruptcy, fewer borrowers are able to escape their debts. The less likelihood of being exempted from their debts through bankruptcy will helps the borrowers to carefully examine their own ability to pay off the loans. Hence reduces the bad debts outstanding in our society.

In addition, many political and lawful figures have begins to advocate a better disclosures of credit cards. Attorney General Mike Hatch from Minnesota has told the Fed that “the boxed disclosures should be made on the front page of any solicitation or on a separate sheet of paper, not buried someplace where customers might not see all the charges.” Although it was successful, while the bankruptcy was still pending, several Democratic senators attempted to add provisions to the bill to enforce more card disclosures and regulate the number of applications mailed out to consumers.

In the other hand, credit card marketing towards the minor and college students are now scrupulously monitor by the local state governments. Some has proposed to prohibit such marketing tactics towards the young adults through legislation. And some of the states have passed the law to regulate credit card marketing on campus.

Nevertheless, some banks adopted ethic solutions to help their customers getting out the debts. For example, the discovery has recently started up their method of showing sympathy by sending the borrowers hand writing cards. They have also tried to work with the cardholder to develop up a cooperation plan to ease up the burden of debts. “Discover customer service representatives are authorized to slash minimum payments by up to 75%: cut interest rates by as much as 50%, and drop fees for late payment.” said Carlos Minetti, Discover’s executive vice president of card member services.

Over the century, credit card has evolved and transformed into an indispensable necessities. It is no longer utilized merely for the simple function of purchase on credit. By using one plastic card, money transactions are allowed to be more mobile and move widely. Consumers not only can exercise in the physical stores, they can also purchase items over the internet, pay the utilities bills, and even taxes. However, all this efficiency brings by the plastic card can be diminished once it is abused. If the credit card company aims to construct a closer relationship with its customers to establish a bond that forms royalty and a significant long-term commitment, then they definitely should modify their marketing strategy and transform its public image. The industry should reform its practices and educate consumer more about consumer credit. In addition, the industry should embrace themselves more social responsibility and must also take in the role as a financial counselor rather than just lender or debt collector.


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The Plastic Card Effects

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