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Still More on the Consumer Credit Substitution Effect:

I have previously written on how the growth of credit card lending came about as a substitution from other less-attractive types of consumer lending. And how the current credit crunch has resulted in a sort of reversal of history, as middle-class families who are suddenly unable to get credit card and other similar loans increasingly have been resorting to alternative types of credit, such as layaway and pawn shops.

Now comes the inevitable next shoe to drop--the increasing use of payday lending by middle class consumers who have found their credit lines reduced on credit cards or otherwise unable to get access to credit, especially for urgent expenses like car repairs or to avoid bounced-check fees:

Payday loans typically a way working-class people get cash in a pinch, are increasingly being sought by middle-income families living without a cash cushion.

Lenders and others say the short-term loans are being taken out by people who used to get needed cash from a bank, a credit union or a credit card. With the recent credit crunch and recession, high-interest payday loans have become an alternative.

RPT (mail):
Eliminating or reducing organized labor will also help squeeze the middle class out of existence. This must be part of "Joe The Conservative Political/Financial Advisor's" program. Straight to Potterville.
2.4.2009 6:16pm
ohwilleke:
I agree that credit card lending came about as a substitution from other types of consumer lending, but credit cards did not mostly replace layaway, pawn shops and payday lending.

Instead, credit cards mostly replaced store specific lines of credit for specific purchases, often accompanied by purchase money security interests. Credit cards have insulated retailers bottom lines from the credit risks posed by offering this kind of credit themselves.

Credit cards were also a key factor in making economically possible to virtually end the use of purchase money security interest for household goods.

The demise of chattle mortgages in consumer transactions, accompanied by the adoption of general exemptions from creditors in and out of bankruptcy, for household goods, has removed a great deal of collection activity with very high social costs, and very low social benefits (although the rent-to-own industry have carved out a little world of economically similar transactions for those who really need them and often can't qualify for credit cards).

A more likely replacement with the true middle class (I honestly don't think that payday lending will make much sense for most middle class people -- the amounts are too small to be useful and the interest rates too high compared to alternatives out there), may be increased use of "overdraft protection" from locally owned banks and credit unions that have established relationships with customers, 401(k) loans, and formal or informal loans from employers to employees as advances against pay.

Employer loans are something I've seen when individual employees are in hard times both at places where I have worked and among people I've encounted in my law practice -- they are often honored more reliably than other debts because the implicit collateral is loss of a job, and because the employer is in a good position to evaluate an employee's ability to pay.

We are also likely to see a return to retailer credit or credit equivalents. Is it a coincidence that Hyundai has both double digit sales growth and is offering to buy back cars it finances in the first year after the sale? Meanwhile Chrysler dealers are reporting losing many sales as a result of an inability to qualify customers for credit.
2.4.2009 6:38pm
Sean O'Hara (mail) (www):

Straight to Potterville.


Watch the movie again -- George Bailey was a subprime lender who gave loans to people he knew were bad credit risks, and employed incompetent relatives. Mr. Potter was the voice of fiscal responsibility.

Bedford Falls in the "real" world was a stolid little backwater; Potterville was a hive of economic activity.
2.4.2009 6:42pm
Sean O'Hara (mail) (www):
Using a payday loan to avoid bounced check fees ... isn't that like killing your youngest child to save money on food?
2.4.2009 6:45pm
BGates:
Sean - it's killing your youngest child to be able to go to better restaurants. Part of the stimulus, you see.

RPT - It would be so much easier to save the middle class if you could eliminate people like Joe the Plumber, wouldn't it?
2.4.2009 6:56pm
10ksnooker (mail):
Money just isn't what it used to be -- Why work when the money and health care is free.

What did you expect when you hire a street walker with a wafer thin resume for President.

You expect PRAVDA to tell the truth? Hah ,,,
2.4.2009 7:03pm
Tony R:
It is sad when a payday loan charging 15% interest every two weeks is a better financial decision than being late on a credit card. If you make a late payment on a credit card expect a $30-$40 fee. This fee is likely similar to what you would pay for the payday loan. Unfortunately, once you are one day late on that credit card the APR jumps to the "default" 29.99% rate. Once other lenders find out, many allow "universal default" and raise their rates too. If you have a top 10% credit score you could probably negotiate your rate back down or even get the card company to waive the fee, but if you have a top 10% credit score you probably wouldn't be short on cash to pay your bill in the first place. The rise of the payday loan industry and their usurious rates isn't a result of their business practices, but rather the credit card companies' miserable conduct during the past few years.
2.4.2009 7:20pm
ShelbyC:
Bounced check fees should be listed as an alternative type of credit.
2.4.2009 7:43pm
Chem_geek:
Tony R, exactly! Hear, hear!
2.4.2009 8:12pm
Art Eclectic:
The fact that the middle class even needs credit cards to cover expenses means they are living beyond their means and not saving. Too much house and too much car in relation to income is the problem. Credit cards were just a handy solution that is fast becoming a non-solution.
2.4.2009 8:12pm
Commenterlein (mail):
Every time you call layaway "credit" I grow more convinced that you need to (re-?) take an intro econ class.
2.4.2009 8:18pm
Ricardo (mail):
Unfortunately, once you are one day late on that credit card the APR jumps to the "default" 29.99% rate. Once other lenders find out, many allow "universal default" and raise their rates too.

If credit card companies are going to be criticized, it should be on the same grounds as mortgage originators: they relied too much on credit scores and were too willing to extend credit beyond a person's reasonable ability to repay. What you quote above may strike a consumer as unreasonable but this practice is based on simple correlation: borrowers who always pay on time are a much, much better credit risk than those who are late even occasionally.
2.4.2009 8:37pm
DCP:

The real villains are the "Title Loan" shops, where you can offer up your car title for a small wad of cash - and usurous interest terms.

I remember the local paper did a feature on them and how they had exploded in poor neighborhoods all over the city (with generous contributions to the right politicians of course). One poor fellow won $80,000 in the lottery and (foolishly) blew most of that on a fancy new SUV. A few months later he needed some quick cash to get the electricity turned back on at his baby's momma's house, and a $300 loan quickly turned into him waking up one night to the horror of the Repo man towing his $60,000 ride off to financial bye-bye land.

That's the double whammy. Not only are you in bad financial shape, but now you just lost your wheels and getting back on your feet without transportation is very hard, unless you live somewhere where there is good public transportation (few and far between).
2.4.2009 8:53pm
CDR D (mail):
>>>The fact that the middle class even needs credit cards to cover expenses means they are living beyond their means and not saving. Too much house and too much car in relation to income is the problem. Credit cards were just a handy solution that is fast becoming a non-solution.


<<<

Oh, BS.

I use a credit card for convenience, and I pay the full bill every month. In fact, I pay more than the invoice just to stay ahead of any interest.

It is convenient because when I go to a gas station, I like being able to stick the card into the pump, pump my gas, and drive off.

It is convenient because I can sit right here and order something on the Internet, or pick up the phone and dial one-eight-hundred-whatever, give them the card number and get the product withing a week.
2.4.2009 9:07pm
Ricardo (mail):
The real villains are the "Title Loan" shops, where you can offer up your car title for a small wad of cash - and usurous interest terms.

Title loans would seem to target a specific demographic: people well-off enough to own a car outright but who are otherwise too irresponsible to have a decent credit history. Plus, the collateral of the loan is of uncertain value. Between the time the loan is made and when the repo man shows up, the car could have been in an accident (people with low credit scores are also more accident-prone, btw) or could have developed a serious mechanical defect. I can see why interest rates are as high as they are.
2.4.2009 9:21pm
Xanthippas (mail) (www):

Bedford Falls in the "real" world was a stolid little backwater; Potterville was a hive of economic activity.


Are you cribbing from Wendell Jamieson? Jamieson's movie revisionism is amusing, but had we spent the last fifty years focusing on the housing needs of the working poor and the middle classes as George Bailey was determined to, we might be living in a very different-and more stable-economic environment now.
2.4.2009 9:26pm
Xanthippas (mail) (www):

Sean - it's killing your youngest child to be able to go to better restaurants. Part of the stimulus, you see.


I challenge you to find a single person who has taken a payday loan "to go to better restaurants." Payday loans are not exactly the most effective way of living beyond on your means, unless you intend to do so for about two weeks until your next paycheck rolls in.
2.4.2009 9:28pm
Elliot123 (mail):
"I use a credit card for convenience, and I pay the full bill every month. In fact, I pay more than the invoice just to stay ahead of any interest."

Is there a reason to use a credit card rather than a debit card?
2.4.2009 10:09pm
EricPWJohnson (mail):
Are there enough consumer safeguards in place for payday loans?

Where are the garnishment regulations and restrictions.
What truth in lending applies?

Should the Federal government be on the hook if this type of lending reaches the banking institutional level in the next few years?
2.4.2009 10:17pm
Dr. Weevil (mail) (www):
Some credit cards are worse than payday loans. Around ten years ago I had a Visa from a bank you've all heard of that made sure that every payment was late so they could charge a $30 late fee every month. If I mailed my check 3 days before the due date, it took 4 days to get there, if I mailed it 4 days before, it took 5 days, and so on. It was always just one day late. I couldn't mail it 10 or 15 days before the due date because they didn't mail it to me until 10 days before the due date and it took a couple of days to get to me.

On the other hand, if I sent it certified mail with delivery confirmation, I could send it 3 or 4 days before it was due and it would invariably get there on time. Certified mail and delivery confirmation do not speed up the mail, they just make the date of delivery provable. In short, any payment that I could not prove was on-time was late, and I had to pay a $30 charge -- no grace period. To avoid paying that, I had to spend several dollars every month on certified mail and delivery confirmation and make a trip to the Post Office. I should have known that a 2.9% interest rate was too good to be true, since it was upped to 28.9% (I think it was) when my very first payment was 'late'.

To put it another way, that bank was (and probably still is) run by thieves: no kinder word is adequate, and some gross obscenities would be justified if I were writing on my own site. There must have been quite a few conscious thieves working for the bank, since someone established the policy and a bunch of other someones were checking due dates and leaving payments lying around for a day or two or three until they could be called late. It would be nice if one of the executives or junior-level munchkins involved would blab to the appropriate authorities and help put their colleagues in jail.

Payday loans are more honest.

Not entirely unrelated: Has anyone noticed that many credit cards and other bills these days have due dates that always fall on Sundays? I can't think of any reason to do that except to try to fool people into paying late so they can be hit with late fees. Psychologically, if I have a bill due the 15th and today is the 10th, it feels like I still have quite a bit of time to get it in the mail. Of course, if the 15th is a Sunday and the creditor is not open weekends, I only have 3 days, not 5, and need to mail it immediately.
2.4.2009 10:21pm
ResIpaLoquitur (mail):
Any comment on the related item of Refund Advance Loans (RALs) on your Tax Returns?

I'm sure most of us have seen them: your tax preparation service offers you an advance on your tax return in exchange for a small cut of it. Most people don't realize that they're technically getting a loan dependent on your return being accurate; if your actual return turns out to be less than your loan, you can get hosed in credit fees.

I'm saddened by how many people fall into it. I ran a DOD tax service at an Air Force base a few years ago, and I advised a lot of kids to use our service over the commercial preparers. They wouldn't listen to me, because they liked getting their "refund" on the spot. I noted that they could get their refund for the full amount via e-file within 2 weeks, but alas...instant gratification....
2.4.2009 10:26pm
EPluribusMoney (mail):
Is there a reason to use a credit card rather than a debit card?

The main one is you can get 1% cash back on all purchases. I buy all my office equipment and supplies, gold and platinum proof sets from the mint, airline tickets, everything on my Discover card and get hundreds of dollars cash back (in the form of a check) every few months whenever it builds up enough. I pay the balance every month so I pay no interest and there is no annual fee.

I'm not sure if the cash back is taxable, maybe if it comes to me personally from a tax deductible company purchase. But I'll use the Daschle defense if they ever call me on it.

Plus I get a float on the money rather than it coming out of my account. And aren't there some kind of fees on debit cards? Last time I was offered one there were. "I said what are you crazy? Pay you to take my money immediately rather than have Discover float me 6 weeks and pay me to do it?"
2.4.2009 10:28pm
ResIpaLoquitur (mail):
Dr. Weevil:

Here's a start: New Law Makes Payday Loans to Military Illegal

The military got very frustrated with PayDay loans a few years ago, and this was the result. I haven't followed the issue in awhile, so I don't know a) if the law has changed, and b) how well it's been enforced.
2.4.2009 10:30pm
ResIpaLoquitur (mail):
Sorry, last comment was to EPWJohnson...but Dr. Weevil is still welcome to read it.
2.4.2009 10:30pm
Dr. Weevil (mail) (www):
Huh? Why is that addressed to me? My point was that at least one Visa is far worse than a Payday Loan. I can see circumstances in which a Payday Loan would be my most attractive option. Just six weeks ago I had a sudden and unexpected $400+ car repair that fortunately came when I had just enough in the bank to cover it and only a few days before payday so I didn't need to reserve any of it for groceries or other needs. (I teach at two different schools, so bumming a ride from a colleague wouldn't work: I'm the only one who works at those two schools. There are no buses in my county. Even if it cost (e.g.) $50 to borrow $400 until payday, that would be a far better deal than several days cab fare for a triangular 27-mile commute in a county with only four cabs, all of which belong to the same company.)
2.4.2009 10:41pm
Dr. Weevil (mail) (www):
Thanks for the clarification.
2.4.2009 10:43pm
Tony R:
Dr. Weevil - I have to agree with everything you said. Interesting note - 60% of my recurring/revolving payments over the past six months were due on a Saturday or Sunday. Should be something like 28-30%. This has always bothered me too.
I should have probably noted in my original comment that I truly believe in the ability of parties to contract to anything they want to. You loan me $100 this week and want $150 next week? As long as we are both consenting adults I have no problem with this. I you offer me a 40% APR credit card and I take it and use it then shame on me.
My main problem with credit cards is that they change your agreement after you enter into it. If your car loan or mortgage holder tried half the things that credit card companies tried it would be illegal in all 50 states. At least with a payday loan you know the terms up front and they can't be changed.
2.4.2009 11:35pm
RPT (mail):
"Sean O'Hara:

Bedford Falls in the "real" world was a stolid little backwater; Potterville was a hive of economic activity."

Yes, it's not as if Potter's man stole Uncle Billy's misplaced deposit. That was absolutely contemporary "hive of economic activity" behavior. But for that grand larceny, the Savings &Loan would not have been in jeopardy. The more things change, the more they stay the same.
2.4.2009 11:36pm
Jmaie (mail):
In fact, I pay more than the invoice just to stay ahead of any interest.

You don't mind loaning money to the card issuer?

I read Art Ecletic's use of the term "expenses" to mean operating expenses rather than convenience purchases such as gasoline. Families who use credit cards to pay for food and household bills while carrying a balance are the folks he was referring to.

Late fees are extremely easy to avoid these days - just pay on line.
2.5.2009 12:03am
Dr. Weevil (mail) (www):
Just pay on line? That doesn't always work. I've been trying to pay my Verizon bill on line or by phone for the last week and a half, but the website tells me my User ID and password are invalid, invites me to create a new User ID and password but then tells me that that page is "currently unavailable" (14 times so far on 6 different days). The telephone payment system asks me to type in the account number at the top of my bill, then tells me it's invalid, and the human beings (when I can finally get hold of them) assure me that of course it's valid and will work but they can't take my payment themselves, they have to connect me to the automated telephone payment system, which tells me (again) that my account number is invalid, at which point it takes another 20+ minutes to go through all the hoops to get back to a human being again. Result: one late payment, assuming the Post Office delivers it at all. Cause: incompetent programming or an attempt to get more late fees? I really can't tell.
2.5.2009 12:13am
Perseus (mail):
Is there a reason to use a credit card rather than a debit card?

See this article on "10 Debit Card Dangers." The most important reason is in case the card number is stolen. Debit cards don't necessarily have the same liability limitations as credit cards. And even if the liability limitation is comparable, you could still have your entire bank account cleaned out before you realize it and then be forced to wait a while before the money is credited back to your bank account.
2.5.2009 1:59am
theobromophile (www):
Just pay on line? That doesn't always work. I've been trying to pay my Verizon bill on line or by phone for the last week and a half, but the website tells me my User ID and password are invalid, invites me to create a new User ID and password but then tells me that that page is "currently unavailable" (14 times so far on 6 different days).

I had that problem, too. I would say that it's a system-wide problem, but it's obviously NOT. Thing is, when I sent a complaining email, I was able to pay my bill online within two hours. I also got a nice, personal phone call from Verizon today.

The other option with them is to pay at an in-store kiosk, which I've often done. Credits immediately to the account.
2.5.2009 2:25am
theobromophile (www):
Verizon, Part II (sorry for the double-posting). I've been having trouble with their on-line system every so often, and, rather frequently, with their billing practises.

At this point, they've messed up so many times (by overcharging me, mostly) that I just email, complain, and point out that this is just another in a long series of screw-ups of questionable legality that always seem to benefit them. No matter what, my problem gets fixed immediately; sometimes, I even get my current month's bill comped.

If you're not the type to raise hell, outsource the raising of hell. This redhead is more than happy to take Verizon to task.
2.5.2009 2:49am
Jmaie (mail):
Verison has an auto-pay system and I haven't given them a thought since I signed up. Everyone's mileage varies but I can't say I experienced near the level of inconvenience as has Dr. Weevil.

By the way, Dr. Weevil, I always enjoy learning new words, I hadn't heard or seen inconcinnity before. Thank you. For some reason all the spell checkers are flagging it.
2.5.2009 2:53am
EricPWJohnson (mail):
What I was tryig to bring up in my consideration of the author's post was

If there is a switchh in "retail" banking to a less regulated sector - the "payday" loans - is there a potential for a significant amount of consumer lending falling again outside the perview of the Treasury department?

If I recall - credit card companies were generally not heavily regulated in the 60's - transformed themselves into financial instiutions in the 89's and now are involved in about all tiers of banking.

Now we have a different sector gaining more acceptance due to tighter lending restrictions
2.5.2009 7:49am
David Chesler (mail) (www):
I use my multi-purpose card as Credit rather than Debit because there's more information on the electronic statement. I consider the float a negative feature because I can't view the holds and it's sometimes hard to figure them out as a reconcile. (I use a home finances program for my checkbook and tax records called Excel.)

If we're using our Credit cards as Charge cards, no problem. (That's not a "feature" for American Express unless you've got no discipline.)

I agree they're slimy. CapitalOne just offered me a feature that they will block most charges that would cause me to go over my credit limit -- I've asked them, and Citizens Bank, for that for years, telling them they have the technological capability, and I would much rather get a Decline at a POS or ATM than a $30 fee. Lots of Sunday due dates here. I thought there was a consumer protection law that due dates had to be 14 days or later after the invoice is received. They sent me balance transfer "checks" to draw on my account once, 0% APR for 6 months, that expired a certain day. I used the check that day, they honored it, but didn't process it for a week or so after, and claimed the offer didn't apply because they hadn't processed it by the expiration date.

Personally I'm glad my family hit bottom financially in 2002, before the bankruptcy laws got tightened up. (Why isn't the tightening of bankruptcy laws considered a bigger contributor to the housing collapse?)

As for Bedford Falls, my father, who retired as the National Collections Manager for an old-school commercial credit ratings company, used to say "Who cares about a $200 discrepancy? Write it off as an accounting error [even if it's not divisible by 9] and move on!"
2.5.2009 9:15am
fountainpop (mail):
One thing that's overlooked in the whole mess is the diminished availability of bankruptcy to discharge credit card debt. Before the bankruptcy amendments, consumers could file Ch. 7, eliminating credit card debt but saving their homes. Now, for some people, Ch. 7 isn't an option so a problem becomes a catastrophe.
2.5.2009 10:20am
Art Eclectic:
I read Art Ecletic's use of the term "expenses" to mean operating expenses rather than convenience purchases such as gasoline. Families who use credit cards to pay for food and household bills while carrying a balance are the folks he was referring to.


Thank you, Jmaie. That is exactly what I mean. I run everything through my Amex for the points and pay it off every month. There is a huge difference between credit cards and charge cards. Credit cards allow you to carry a revolving balance at interest. They are a loan, made on assumption of future earnings. A charge card (Amex) must be paid off every billing cycle. It's one thing put a large purchase onto a revolving credit card in order to spread the payments out -- however, credit cards have become their own form of payday loans for people living beyond their means. Credit card companies are seeing default rates that defy their normal statistical models and the next meltdown happens in the credit card world. If you are carrying a revolving balance - pay it off ASAP and run like hell - major changes are coming to your account.
2.5.2009 12:07pm
Douglas2 (mail):
Re: advantage of credit cards over debit cards: When I lived in the UK, the local pertol station that we used all the time had their card terminal switched with one that skimmed the numbers and PINs. We used our credit card and had no repercussions after a short phone call from the credit card company to double check that we hadn't just ordered 20000 pounds worth of Bose stereo equipment to be delivered in Bangelore. Our friends who used debit cards did eventually get the contents of thier current accounts back, but only after much time and many bounced payments.
2.5.2009 1:09pm
Harry Eagar (mail):
Got news for you. The middle class, or large portions of it, have been using pawn shops all along.

My friend who owns a pawn shop has 11% of the area's population as customers annually, and he has for years and years.

His isn't the only pawn shop.

I sometimes spend an afternoon behind his counter, watching the passing parade. You see lawyers, teachers, real estate agents, county councilmen, pretty much everybody. (I don't think I've ever seen a physician, but I've seen their wives.)
2.5.2009 6:46pm
CDR D (mail):
>>>"I use a credit card for convenience, and I pay the full bill every month. In fact, I pay more than the invoice just to stay ahead of any interest."

Is there a reason to use a credit card rather than a debit card?


<<<

Well, it's like this.

If I pay the total credit bill each time I receive the bill, I pay no interest. And, my credit card provider gives me one point for every dollar I charge.

That adds up to points I can use to claim FREE STUFF.

It's neat.

That's how I recently got my GPS receiver.
2.5.2009 7:45pm

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