The Ineffable Hand Of The Free Market

Posted by on . 4 comments.

Someone will have to explain this to me, since — despite that Ph. D. in Finance — I’m not enough of an economist to figure it out for myself.

Everyone knows that a business model inspired by the maxim “you can screw all of your customers all of the time” is not viable in the long-term.

Everyone knows that, in any industry, sufficient competition forces all competitors to:
— keep their customers satisfied by delivering real value at a reasonable price
— abstain (albeit regretfully) from behavior such as price-gouging or anything which reeks of extracting abnormal profits

In the home mortgage business, competition forces lenders to offer loan rates that reflect a borrower’s creditworthiness (or, at least, that’s the standard business model, even if the industry decided to ride roughshod over those rules in the recent past). If you have a higher credit rating, you enjoy a lower loan rate. Which is only as it should be. And the invisible, ineffable hand of the free market makes it happen.

So why does the effing hand of the free market not goose the credit card industry when it flagrantly flouts this simple rule? Why is it that in the credit card lending business, competition somehow forces lenders to:
a) club borrowers with widely different credit risks together, and charge them the same loan rate,
b) make that loan rate so outrageously out of line with any sensible notion of the average risk of the borrowing pool, that it can only be described as unconscionable usury?

I have had a Citibank credit card for more than 25 years now. Except for brief and isolated periods (of a few months at a time) it has been my primary credit card, the one to which I charged everything. They can not only look up my excellent credit rating, they also have inside information on my creditworthiness. They know that I have never missed a single payment in 25 years.

And yet they had the unmitigated gall to send me a letter two weeks ago informing me that my variable APR on purchases was now going to be 29.99%. Of course, as always, I have the right to opt out and pay down my current balance under my current terms.

Well, as it happens, I’ve been paying my bill in full each month, so I’m not currently carrying a current balance. And if they think a 29.99% APR is a fitting reward for 25 years of customer loyalty and an unblemished payment record, then to hell with them. I’m certainly not going to keep this card. And I’m certainly not going to ever carry a Citibank credit card again.

I do realize that competition in the credit card business (and the invisible, infallible hand of the free market) has somehow forced all credit card companies to simultaneously hike their variable APR on purchases to similarly usurious levels. So I probably have no choice but to carry a card with a 30% APR. Since I have no choice, I’m willing to accept that rate from a perfect stranger with whom I don’t have a 25 year record of unblemished payments. But I sure as hell am not going to accept it from Citibank. If they have no loyalty towards me, I don’t see why I should have any loyalty towards them.

And I can’t help idly wonder that if a large number of customers who are excellent credit risks closed their Citibank credit card accounts in outrage at being asked to pay that usurious rate, whether that would force Citibank to realize that maybe they should offer better rates to their more creditworthy customers?

Comments

  1. kiel says:
    October 28, 2009 at 7:28 pm

    Well said, er, posed, er protested! Or all of the above. These people are scum, and obviously in collusion.

  2. tom says:
    October 29, 2009 at 11:09 am

    “Everyone knows that a business model inspired by the maxim “you can screw all of your customers all of the time” is not viable in the long-term.”

    this does not stand up due to the existence of insurance companies, banks, and many other widespread “essential” businesses. this kind of behaviour is not new on the behalf of banks.

  3. Rick says:
    October 29, 2009 at 3:24 pm

    I also received that letter. And in answer to why they don’t see that screwing their customers is not a viable business model, it’s because the customers continue to take it with no major protest. People feel that they must have credit cards, and the lenders have joined together, unofficially of course, to raise the rates to the maximum that people can pay.
    They claim it is due to increased risk and defaults, but raising rates is only going to increase defaults, either because people can’t pay, or because they fell betrayed and taken advantage of and won’t pay.
    I put myself in this category. I have a fairly large balance that is going to 29.99% even though I have never missed a payment in the 25 years I have had this card. I might possibly be able to pay the higher rate, but I refuse to. And I am not going to cancel the card and pay off at the old rate either. I am going to stop paying and let the loan go into default. Let them trash my credit rating – with these rate policies it’s meningless anyway.

    The only way I can see for these companies to come to their senses and return to reasonable practices is if the customers they are screwing can band together and refuse to accept it. I propose a payment strike. Until these companies lower rates back to a reasonable amount, do not pay them anything. If they go from receiving timely payments of principle and interest to receiving nothing due to their abusive practices, they will be forced to return to sound business practices, which include giving they consumer a fair deal.

  4. matt says:
    October 29, 2009 at 5:17 pm

    trashing your credit rating out of spite or protest sounds like a really bad idea.