Credit Cards for Young People

[fclbrokle]

The recent congressional legislation on credit cards (expected to be signed by President Obama, including a totally unrelated measure to allow concealed handguns in national parks) limits advertising that credit card companies can do towards young people. It would require, for anyone under 21, either a parent cosigner or demonstration of

Comments

[hahafaha]

So, a very interesting argument I have heard about drinking ages being lowered is this: many people will have had several years (maybe, like, 5) worth of driving experience by the time they are 21. However, those few who have never had any drinking experience and who decide to try it at 21 will not have the sufficient understanding of the effects. They will drink a pint, not notice any immediate effects, decide that it's safe to drive home, and 30 minutes later get into a car accident.

In a way, this is similar. Sure, we don't want people drinking because it's bad for them, but mostly, it's bad for other people. If there's one thing that the economic crisis has shown, it is that people spending money that they don't have (and have no plausible chance at ever getting) is supremely bad for other people, and that the market doesn't do a good enough job of internalizing that cost to society

[fclbrokle]

There's a group of college presidents arguing for lowering the drinking age. It's called The Amethyst Initiative, and, to be honest, I see their points---as someone who doesn't drink at all.

[meep]

Way back in the day before they decided to federalize the drinking age in the U.S., some states had graduated laws, where you could drink weak beer from age 18 - 21 (or something), and then could buy the hard stuff thereafter.

I would be cool with limiting the under 18 crowd to Bud Lite, for example. You can still get drunk on that stuff, but to get to that point (for those of Irish extraction at any rate) you're going to be rushing to the toilet a lot. Some people get drunk much easier, of course.

[easwaran]

It sounded like the other parts of the bill were fairly good, requiring credit card companies to be much more transparent and less punitive in terms of changing rates on people and charging hidden fees. I've never really known what rate any of my cards charges, and only very rarely notice fees for things like using foreign currency, or "finance charges", whatever those are. I suspect that many people that are in much worse financial situations are at least as ignorant as I am about those sorts of things, so it's good to make them more transparent, even if it drives up costs slightly for people that are better credit risks.

However, I think you're right that it's better to allow young people to have credit cards, but perhaps with lower limits and the like, so that they can learn how they work in a lower-risk environment. Although again, I don't know how much lower-risk the home environment is than the adult environment, for children growing up in low-income families.

[fclbrokle]

It's a tricky thing. The problem is that, for unsecured debt, you need to charge a pretty high interest rate for it to be reasonable. I agree that greater transparency is good and I don't mind my interest rate going up to compensate for the fact that this is unsecured debt. However, the law also mandates, for example, that if a customer is delinquent with a payment you're not allowed to raise their interest rates for a period greater than six months. That denies the credit card companies the ability to account for the customer's full risk profile, meaning that everyone gets higher rates because this person's rate must be lowered back down. Basically, it's like asking an insurance company to set a life insurance rate but only allowing them to account for illnesses in the past year, and nothing that might have come up before then.

[oxeador]

This is somewhat unrelated, and I am going to sound elitist, but I do not understand why people need to "learn" the consequences of not handling credit properly enough. Isn't it evident? I submit that anybody who does not understand this is suffering from innumeracy. I mean, the rules are clear. Well, there are hidden charges and all that, but you know you are going to have to pay a large fee plus a large interest if you do not make your payment in full every month. It is obvious that buying something that you cannot pay in full at the end of month is a bad idea, unless you really do not have a choice (for instance, a medical expense, rather than something you can get by without

[oxeador]

I do no think it is so much instant gratification -- by now, pay later -- as "buy now, even if you do not have the ability to pay now, and neither will you later".

[fclbrokle]

The biggest flaw in your argument is that it *is* innumeracy, and lots of people suffer from that. Innumeracy is a much harder problem to fix, but you can "learn" negative effects of credit cards from personal experience or from watching it happen to others, without understanding the underlying mathematics.

Here is one example of a case where I would want to use a credit card. I own a business and I get a large order, payable on delivery. I need to buy the raw materials to fulfill this order. I use a credit card, acknowledging that I will pay a large interest rate, but also that I will make greater profit than I pay in interest. The same can happen on a personal level: as polynomial pointed out, buying a suit for a job interview; buying a car or gas to continue to get to a job; buying food for my children until I can get a job while I'm unemployed