Hacker News Reader

Comment by rm_-rf_slash | Hacker News Reader

There was an eerily prescient 2006 documentary about consumer credit called "Maxed Out," which featured a scene where someone recalled going to a conference of bank and credit card executives, and one of the CC CEOs plainly stated: "The bulk of our profits come from people making minimum payments for the rest of their lives."

As for "pay-in-full" folks like you and me, credit card companies could care less. Whenever we pay with plastic, they get processing fees.

View on HN

When I came to the US I couldn't figure what "minimum payment" means. It took a while to realize that it's a totally arbitrary amount and really has no meaning for any kind of financial planning. I bet a lot of people think they are paying off their debt by making minimum payments.

I don't know if it's a law here, but every account statement I've ever gotten on revolving credit has always included a statement below the minimum to the effect of: "If you only pay the minimum payment, it will take you 10 years, eight months to fully pay off this debt."

When you see that beside a $2000 or $3000 balance, it paints a pretty clear picture of what paying the minimum is doing for you. I think the only way it could be improved is by adding in how much interest you'll pay over that time period.

It's not entirely arbitrary. It has to cover the interest for the payment period and some portion of the principle balance.

Only paying the minimum will certainly result in paying a large amount of interest.

The "some portion" part is certainly arbitrary. In any case, it's named in a way that people feel safe but they absolutely aren't.

Well the idea is people don't pay off the principle fast enough not to end up maxing out their cards. Then they just apply for new ones. This is why people are in hock for life.

Then come the vultures. Consolidation loans, payday loans, etc.

How do CC companies make money off of minimum payments? Don't they lose money by lending more than what's paid back?

It's banks that do, CC companies primarily just facilitate the data exchange between the parties involved and charge per tx fee.

The way banks make money on those payments is the way any other interest loan payment works - you'll eventually pay what you owe but by the time you're done you paid the original debt + interest.

Actually, the issuing banks will get some of the transaction fees as well, so they make out both ways. The "CC companies" are better thought of as networks (Visa, etc.) and they live mostly on those transaction fees, as you mention. The networks don't issue any cards, and they carry debit and other transactions as well, so not quite right to call them "CC companies".

Probably splitting hairs at this point, but yes, the issuing bank will typically get a per-tx interchange fee from the merchant bank. Merchant bank will charge the merchant to recoup that cost.

Yea 'CC Companies' is not the most accurate term, but when someone uses that term in a casual conversation I typically know what they mean :)

At first, yes, they lose money, but over time the interest charges outpace the original balance by far. And people are still bound by credit limits.

Lenders just want debt service, not principal paid back. Loans are an asset on a bank's balance sheet.

Are they really even lenders anymore? I'll refrain from colorful characterizations of what they might be. Real lenders throughout human history want a nice predictable retirement of the debt so they can use reserve multipliers.

You ever see the new disclosures on a credit card?

It usually says something like: On your $1000 balance, paying only the minimum will take 7.5 years to pay off the balance and you will pay a total of $3500. Pay $35/mo and will pay off your balance in 3 years and pay a total of $1500.

Which is still kind of deceptive considering if you can't pay back that balance immediately, you likely won't be able to go 7.5 years without putting more on.

The issue isn't predatory lending by credit cards (necessarily anymore), it is our obsession with having material goods and "keeping up with the Joneses"... who are also in debt up to their eyeballs.

So, in my mind, it is just a race to the bottom (of your lifetime bank account).

Reply on news.ycombinator.com