Out of Control Policy Blog

Our Credit World Without Personal Responsibility

The New York Times wrote an irritating editorial last week that epitomizes the attitude American culture is taking towards personal responsibility. One of the proposed regulatory changes is a Consumer Financial Protection Agency to stop "abusive" practices by firms offering financial products. The CARD Act has already been passed into law, restricting credit card companies operating practices, and raising the cost of credit. And the NYT wants more.

The NYT argues that banks are being abusive with overdraft charges and should be more transparent with their notification practices. They argue that it is wrong to charge high fees when people over spend their accounts. They cite stats that say banks will collect more than $38 billion this year in overdraft charges. But why is this a problem?

Do banks list in contract terms for bank accounts when people sign up what the overdraft charges are? Yes.

Do banks send out notifications when the terms of contracts change, giving people a chance to move banks if they don't like new rules? Yes.

Should the people who fail to keep track of their finances and overspend their accounts be held personally responsible for their own errors? Yes.

Why are banks the victims here? It isn't just this, it's the whole attack on abusive practices from banks. There are times when banks break the law, or when product managers bully clients, sure. Those are criminal acts. Punish them accordingly. But just because a bank charges $35 if you overdraft your account doesn't mean they are suddenly in the wrong.

The NYT tells this story to make its point:

One college student whose bank records were analyzed by the center made seven small purchases including coffee and school supplies that totaled $16.55 and was hit with overdraft fees that totaled $245.

The Times would like to paint the bank as the one in the wrong here for the high charges by painting their "evil" corporate ways against the backdrop of someone "just getting coffee" and the all important "school supplies". But what is the reality? Person A did not have enough money in Bank account Z. Person A committed the money of Bank Z to various retail outlets. Bank Z, following the agreement they had with Person A from the start, paid the retail businesses, but charged fees because they were giving up their own money instead of Person A's money. In cold hard facts the bank isn't wrong, though anecdotally they look like Mr. Potter.

The Times supports laws that would require banks to warn customers in real time when a debit charge to their account overdrafts. They support legislation that would force banks into more transparency. But is using the power of the state the right way to go? No, that will just force banks to do the minimum necessary and allow people to not have to take charge of their own finances? With online banking how hard is it to check the level of your checking account each morning before you head off on your day?

If more transparency and better notification of pending overdraft fees is really important, then a grassroots effort can make that known to banks. Banks can use this as a competitive advantage. Very few laws have been passed forcing companies to "Go Green" but they are doing it anyway to gain customers. The same can happen here, with Citigroup trying to win back customers by offering services like The Times wants shoved down everyone's throats. Then Bank of America and Wells Fargo would follow suit to keep customers from leaving them. And if customers didn't flock to Citigroup, then maybe its because the laws The NYT's likes really don't matter that much to everyone. So why would we want the supposedly all knowing state to force us into them, likely raising the cost of checking accounts? It is all just so ridiculous.

Anthony Randazzo is Director of Economic Research

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Comments to "Our Credit World Without Personal Responsibility":

M. David | August 26, 2009, 11:17am | #

I think its important to remember, that there are valid reasons why someone may be in overdraft and not intentionally. For instance, just recently, I sent a $1200 payment on my Credit Card which was about double the minimum due. Unfortunately with the current economy, I have had to float my business during rough times with Credit Cards, which is not the best way to survive, but nonetheless, it is survival. My Credit card company posted the payment, and it lowered my outstanding balance. In my mind, I had at least $1200 available credit plus $500 that was available prior to the payment. I had to do a business purchase in the amount of $1099.00. As far as I'm concerned, I had plenty of Credit line. So I did the purchase, and the transaction was approved.

What I didn't know was my payment that was mailed through US Postal service arrived 1 day late, and as a result Citibank Computers changed my 3.5% interest rate to 25.90%. Then their computer charged my credit card account finance charges based upon the 25.90%, which put me over the credit limit. I was hit with a late payment fee of $39.00, and over the limit fee of $39.00

Of course, I didn't know all of this was occurring, but when I went to put $40.00 worth of gas in my car on my credit card, and the transaction was declined, you can imagine, I'm wondering why.

I go home and log in to my credit card account and I am blown away at what has occurred.

After talking to Citibank Reps on the phone, they adjusted my interest rate back down to 3.5%, and waived the fees, which was nice.

However, one thing you have to understand is even when you do manage your funds and think you are doing well, the bank fees and the rules they run by are ridiculous. Especially since the over the limit occurred as a result of the banks fees they added. And then they had the nerve to add over limit fees because they caused the account to go over the limit with the finance charge.

The Citibank Rep, said "three things that can cause your account to go into default and your interest rate to jump is "late payment,even late by 1 second" - Over the credit limit (which ironically, the banks will not decline charges that will go over the credit limit, cause they want you to go over the credit limit) and a payment that is returned by your bank.

So I have to respectfully disagree with the article, because there are valid things that can occur that are beyond one's control or even their knowledge and the banks TAKE ADVANTAGE of it.

Which reminds me. the government has given billions of dollars in bail-out money to banks. DID THE BANKS USE THAT BAILOUT MONEY TO EVEN DIVY IT UP TO THEIR CUSTOMERS? No, they did not, instead the banks, kept the money, spending it on bonuses, and then turned around and started increases everyones interest rates.

It is the small business in America that keeps America Running. Did the government give any bailout money to the small business, the backbone of our country. These are the businesses that are financially struggling, closing doors everyday at the hands of the corporations who did receive the bailout money, yet small business America comprises the majority of our economy. Anthony, Id like to see you do an article on this.

Snazzo | August 26, 2009, 11:36am | #

David - the bank was within their rights to do what they did. And it got your attention. And, to your credit, you acted quickly and resolved your problem.

The problem is not the bank's!

And the problem is certainly NOT the government's to solve!

If either the bank or the government solved your problem, YOU would not have had to.

And then you would be eliglble to be a DEMOCRAT.

M. David | August 26, 2009, 11:49am | #


I disagree. They don't have the right to modify the agreements or terms of the interest rate simply because the post office delivered a payment 1 day late, and change what was $150 interest (roughly) to close to $1000 interest, simply because the post office didn't deliver a payment on the correct day and to do it without telling you, and then because they did it, turn around and charge an over the limit fee, which it was the BANKS COURSE OF ACTION that cause the over the limit.

As to being the governments problem, yes, that is exactly what government is for, it is to regulate and create laws to prevent companies and individuals from getting out of hand.

If government did not create laws, we would have chaos. So if it is not the governments problem to solve, why is it that YOU and YOUR ORGANIZATION seek the government to PASS LAWS to regulate gay marriage. That's not for the government to resolve either!!!

You can't have it both ways. You want government out of your business when its convenient, but then you want them to regulate things when its on your agenda.

Snazzo | August 26, 2009, 12:10pm | #

You have the right to disagree - but it doesn't make you right.

If you ask me, our government (in modern times) has created more chaos than it is ever irradicated.

To your last point, you have stated the issue entirely incorrectly. And you have not tied these two issues together by any means, so lets not debate this here.

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