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Sunday: October 19, 2008

Crunchy Credit

Filed under: — site admin @ 10:57 AM UTC

InstaPundit writes:

THE CREDIT CRUNCH DOESN’T SEEM TO HAVE HIT BOTTOM: In the line at Target yesterday, I watched a woman have her credit cards declined. The response: Want to take out a Target Credit Card? On the other hand, her instant application for that was declined, too. She wound up writing a check for several hundred dollars worth of cakes, pies, and cookies. Meanwhile, I keep getting mailers from my credit-card companies inviting me to use the credit line with handy “checks” that produce an instant high-interest loan.

There’s no mystery here. Because banks have lost so much money on deadbeats lately — mostly deadbeats with mortgages, of course –, they are more careful in offering credit, but that means offering more credit to some people, less to others. Broadly speaking, there are three kinds of credit-card user:

  1. Sensible people who pay their credit cards down to zero at the end of the month or at worst run a balance for a few months to pay for unexpected emergencies (medical, automotive, plumbing, or whatever). Banks make very little money from them.
  2. Foolish or dishonest people who accept as many credit cards as they are offered, run them all up to their credit limits, then ask for an increased limit or apply for another card, and keep doing so until they cannot pay even the minimum balances, at which point they file for bankruptcy, or skip town, or just let their credit ratings die a slow and painful death as they learn to live within their means. If they have no assets worth seizing, there’s not a lot the bank can do to them. Banks make a lot of money on these people in the short run — as long as they’re getting those minimum payments, even if the minimum payments are made with cash advances on other cards — but lose far more in the long run.
  3. Honest but foolish people who run up their credit card balances to thousands of dollars even while paying ridiculous interest rates, but nevertheless pay their debts without fail. If they sometimes pay late enough to incur a juicy penalty, but not so late as to require expensive harrassment, so much the better. Banks love these people, and make a lot of money from them.

Of course, these categories are not permanent: many of us have fallen into more than one of them at different times in our lives, and some have been all three. Any bank will want as many users of type C (for ‘chump’) as it can get. While doing their best to screen out the Bs, they keep sending offers to all the As, because they hope that some of them can be tempted to turn into Cs. InstaPundit is almost certainly an A, and the woman he saw in Target is quite likely a B, though she may have been a C in the past. It remains to be seen whether there are enough Cs to outweigh all the As and Bs and (worst of all) the Bs with mortgages and keep banks solvent.

By the way, I hope the woman in Target was buying “several hundred dollars worth of cakes, pies, and cookies” for some event for which she will be reimbursed. Otherwise, there’s a good chance her check will bounce. I also hope neither she nor any of her friends reads InstaPundit, unless he’s fictionalized his account: there can’t be all that many women in Knoxville who spend several hundred dollars on cakes, pies, and cookies at Target in a week or a month, much less a day.

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