blog: On Personal Debt

Judging by the frequency with which it happens, I think it's a safe bet to conclude that it is a common theme of adolescence that advice seems more reasonable when not given by a parent.

So it has been the case, for me, with credit cards. The advice I received from my parents some months ago is not far from the advice I got from other people yesterday, and while I vocally disagreed with my parents at the time, I was fairly hard-pressed to remember what my arguments were yesterday. While I certainly don't need a credit card now, and my parents weren't so much suggesting that I get one as they were advising me to bear my credit in mind going forward, I don't think they were expecting me to declare my intention of, should life accommodate me, never having a credit card.

I didn't seriously mean it, or, at a minimum, I don't think I seriously meant it. If my opinions at that point in time had stayed unchanged for the rest of my life, then I would have avoided plastic; but I don't really expect any opinions of mine to last long anymore. That is the ultimate end result of doing multiple 180s - I've gone at least 520 degrees in the last couple of years, and consider myself still spinning - in virtually every field of opinion.¹

The same is certainly true of my attitude towards credit companies, and lending in general. While, before yesterday, I'd have been willing to admit that much, though probably not most, of the population needs the services offered by credit card companies, that opinion has gone undergone several permutations, thanks to much advice and experience that has been related to me.

In case you haven't noticed, this is a departure from my usual blog fare. But I'm thinking a lot about these things - societal issues and problems - right now, due to an upcoming local election, in which I am personally invested because the bus I ride is largely funded by a tax that is facing repeal. I might write later on why this tax is a Good Thing, but I'll return to the original issue for now...

The Personal Point of View

I find it difficult to consider things from a single point of view, and I think that's why I have reached decisive conclusions on just about nothing. With few exceptions, I see a gulf between actions I could take which are easy, or well-advised, or convenient, versus the actions I would consider correct, or good, or beneficial. As to what each of these things mean, I've opted for the brute-force approach of listing synonyms, as the task of defining all these terms is a challenge I'm not equal to, and so, with this battery of synonyms, I'll just explain this particular instance and hope the issue is clear enough.²

As to what actions I should take, for my own benefit, the path is blessedly clear. I should get a credit card, build up good credit, and get good interest rates for the rest of my life.

Unfortunately, I as far as I can tell, this is an irreconcilable course of action with what is correct - which is, as I have until now maintained, for me to avoid credit cards, and, if I am able to avoid it, debt in general. But to see what action is correct - and I may be wrong there as well - I need to delve into a theoretical model.

The Theoretical Problem

To explain my objection to my own getting a credit card, I need to construct a theoretical model of a credit card company. I'll call the company FooCom.

FooCom offers the FooCard, which offers some arbitrary interest rate, some arbitrary credit limit and - this is important - no operating fees to their companies. What this means is that if a FooCard holder pays everything promptly, the customer never pay interest on what they buy. FooCom, of course, must.

FooCom, like all credit companies, has income and expenditures, and, like all companies, aims to maximize the difference between these, naturally in favor of the former. For my theoretical model here, I will say that the entirety of FooCom's income comes from interest on unpaid or partially paid bills. As for expenditures, FooCom has two: operating expenditures, and interest on the money they must borrow between when a customer buys a product and when the customer pays their FooCard bill. Since this is a theoretical model, we'll say that FooCom has a gazillion lines of completely bug-free COBOL code written thirty years ago that runs the company; operating expenses, conveniently, I will consider negligible. While this is clearly a very poor view of the real world, I don't see operating expenditures as a problem because they are something FooCom, and the market, will try to minimize.

Assuming that FooCom, given this singular source of income and singular source of expense, is to break even or run a profit, it's safe to say that the source of income - interest on customers' unpaid balances - must exceed their expense - interest between payment and billing date.

Now, note that the actions convenient for my situation - that I should get a credit card, pay promptly and consistently and build up my credit score - means that I would contribute to the second group, but never to the first. As such, in order to offset the liability that is me, the company would need to create more people who belong to the first group - who are, somehow, paying more for their FooCard than they are spending on it.

And this is the root cause of all the horrendous stories that we'll hear on 60 minutes. I can already see them now; it's depressingly predictable that FooCom will end up sending out their bills along the slowest route possible so that people will be late, and will employ every other trick they know, and there will doubtless be scandals and such, and we'll all be deeply shocked, just shocked, that it's happening. But, so long as there are people like me - who force FooCom to borrow money between purchase and billing, and to pay interest on that borrowed money - FooCom will, one way or another, have to have customers who don't pay FooCom on time. Without "bad" customers, FooCom doesn't make money.

And therein lies the problem: FooCom is now invested in making sure that their customers have bad credit habits, or otherwise manage to indebt themselves to their FooCard. And the amount to which FooCom does this is directly proportional to the amount of interest they must pay for their "good," paying, prompt customers, because they would lose money on people like that, on people like me.

And so I have a problem. The action I should take, for my own benefit, can only be expected to induce FooCom to somehow take on another bad customer, who is expected to pay back debts and interest to FooCom, and whom I would expect would be quite miserable for this experience. My self-beneficial behavior relies - nay, induces - the indebtedness of another, and avoiding those situations is one of the few things I am comfortable even positing as an absolute Good.³

The Problem, in Practice

This theoretical model I have just presented suffers from the defect of being false. As history and experience have shown me, this is not so nearly as large a threat to its acceptance as is its contention that a company could, possibly, be invested in its customers' ill-being. Such a sacrilegious affront to the presumed universal beneficial nature of the capitalist market is quite quickly condemned as the work of a communist - and must admit I have not yet decided if I disagree.

As for the falseness I alluded to, I was referring to FooCom's income from FooCard; more than just interest, FooCom also gets paid by retailers. It is human nature that we prefer to swipe plastic than hand over cash, for a variety of reasons that I won't address here.⁴ As such, FooCom, more than just providing a credit-building service, also provides a money-transfer service - something I would consider legit, and beneficial to the society.

However, this fundamental incorrectness of my model doesn't mean that the conclusions are incorrect in practice.

From FooCom's point of view, they have two good customers: The balanced-account customer who buys lots of retail goods with his FooCard, thereby inducing those retailers to continue paying FooCom, and the customer who, while he regularly goes into debt against his FooCom card, pays off the debt, plus significant interest, time and again. I do not know what proportions of income FooCom would expect from each stream in the real world.

What I do know is that this second type of customer is essentially a golden goose for FooCom. I think that the hunt for these customers, more than the desire for the first type of customer, is why I receive so many credit card offers; being young, they know I am more likely to treat a credit card as free money, and they have no moral qualms with offering a young and presumably irrational person longterm, perhaps even lifelong, indebtedness - immensely profitable for FooCom - at the minor expense of that person's peace of mind and mental well-being. This is why you will see FooCom on college campuses, and maintaining addresses of people who will go to college soon; college students are "good risks" in that it is almost expected that they will go into debt, then, with their high-paying college-degree-qualified jobs, pay those debts off.⁵

In other words, for FooCom, a miserable customer is a golden goose. Misery in others as a byproduct of benefiting oneself, whether that self is a person or a corporation, is dangerous indeed, and hence why I find FooCom, and the credit card companies who send me offers, and the companies I see on my campus, distasteful. They will not get me, but they are on the prowl for my peers, and the trivial matter that I will not be one of those who are miserable for their profit doesn't make their actions less distasteful.

The Conceptual Problem

As I thought about and discussed this, it became clear to me that there are, actually, two discrete services that credit card companies offer, which are bundled due to the "golden goose" phenomenon being so profitable for those involved.

On one hand, the convenience of a credit card is equally applicable to debit cards. I use a debit card for online purchases, with the absolute same effect as using a credit card, except that a debit card does not improve, nor hold hostage, my credit score. So, one service that a credit card offers is the ability to transfer money securely; this is the same service offered by debit cards.⁶

The other service offered by credit cards is the ability to borrow money on short notice. One warning that was given to me was that, some day, I may need money, quickly, and that if I had no credit I would find it near-impossible. Credit cards also fulfill this role.

Nevertheless, I think that my objection holds because it makes no logical sense that, in order to get the second service, I must make use of the first. By all means, once I move out on my own, I would probably consider it a good form of "insurance" to pay a monthly fee to have the ability to borrow money on-demand. I don't know about the numbers, but I would imagine something similar to insurance; I would pay a bill of a ten dollars a month to have the ability to borrow five thousand at any time, irrespective of whether I had built up a good credit score - which, if this service were available, I probably would choose not to.⁷

I also have general objections to traditional insurance which I won't go into here, but for young people in particular I would prefer if I could pay health and car insurance that, rather than covering the cost of the misfortune, would instead allow me to borrow enough to pay for the misfortune. I may also write more in-depth about that, but not here.

The Credit Rating Problem

There is a final "problem," which I am not convinced is a problem, and that is the problem of credit rating companies. The problem is not so much in the private control of personal information; despite what you may have guessed, I am not particularly anti-corporate, I just think that matters of public good belong in the public sphere. The problem that many people have with credit rating companies is that they will, for example, reduce credit scores based on number of credit score lookups, and even when the person themselves look up the score. While this certainly strikes a raw fairness nerve, I don't really think of those companies as any more than statistics companies; there may be some obscure reason that people who look up their scores are less likely to pay their bills, I don't know. It's not their job to judge fairly, they simply report what is statistically likely.

If that is all they are doing, I see no particular problem. There may, of course, be implementation problems, but programming has taught me that implementations can always be improved, but conceptual problems must be corrected.

I Offer No Solutions

I have outlined a series of problems, all somehow related to my present situation with regards to a credit card. I have not offered any solutions, because I have none. The question of what should be done, and of how the society should implement whatever is decided upon, can be better arrived at by discourse than by my own ramblings. I suppose, then, that there is only one thing left to do:

Discuss.