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Comment by ejb999 | Hacker News Reader

>>Part of me wonders what the world would look like if we massively regulated credit card terms, like no more than 5% APR.

What would happen is there would be no credit cards for anyone. Nobody is going to lend money to the general public at 5% for unsecured debt.

IIRC, they used to be capped at 18% many years ago, still high, but much more reasonable then some of the rates that are out there now; so not opposed to a cap, but it can't be so low that it kills the business altogether.

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I doubt that. Visa and MasterCard make most of their money via seller transaction fees, not credit card debt payments.

If anything, we should limit seller transaction fees, as I believe the EU does.

Visa and MasterCard make most of their money that way, but they don't by and large underwrite the debt -- various banks do[0]. That's why you don't get credit card offers directly from Visa or MasterCard, you get them directly from banks. Visa and MasterCard only care that debtors default insofar as it affects the market as a whole.

[0]-American Express and Discover have somewhat different business models, and do underwrite most of the debt themselves. I don't know about foreign systems, but I'm given to understand they are mostly not credit based.

Visa and Mastercard are payment networks, not banks. They don’t own the debt at all.

Yeah isn't this because visa and mastercard are the issuers, and the banks handle taking on the debt?

The exception to this is Amex who is the issuer and lender.

Discover is also.

Discover is pretty much unheard of in Europe, amex has grown a lot in the last 10 or so years, it’s almost as common as visa/Mastercard for acceptance.

But my inference from futurama is very few outlets take discover even in the US?

I would not say very few. All big businesses or franchises accept it.

Visa/Mastercard don't lend money. Banks do.

That seems unlikely. Settling accounts instantly in that kind of system is almost impossible. Unless the money is going directly from payer to the payee there must be some slack in the system somewhere, and that means debt. I will admit though I could have an incorrect understanding of how these accounts are settled.

They're not settled instantly, but broadly, this is one of the reasons the credit card networks are a massive accomplishment; they settle deterministically enough that a commanding majority of financial institutions will trust the networks sufficiently to transact with them. Yes, this is accomplished by absolutely massive amounts of (mostly offsetting) debts carried between various parties every day of the last several decades.

I should probably write more about this subject at some point, but the GP is of course correct; the credit card networks (except for Amex) generally do not put up money at any point. Each entity in a chain about 5 links long makes simultaneous and very quick agreements about offsetting transactions between themselves, with probabilistic assurance of eventual settlement to the business being "very, very quick" and physical settlement happening in a few days to about a month later. Typically an important step is the issuing bank settling with an intermediary (not the network) who will settle with the merchant bank or payment processor who will settle with the business.

I think you misunderstood the GP: there is debt, but it's owned by banks, not by VISA and MasterCard. They just provide the payment network.

Do the banks directly transfer to one another? I'm genuinely naive on this topic. I don't even get the value add of visa at that point.

Yes, banks do net settlement with each other. They tally up all the debits and credits on both sides and then make a single transfer to settle between each other. Say Bank A owes Bank B $200, and Bank B owes Bank A $150. Bank A will send Bank B $50, as that is the net amount after subtracting 150 from 200.

https://en.m.wikipedia.org/wiki/Net_settlement

Not an expert either. As I understand it, credit card networks provide the infrastructure that lets entities settle payments: providing cards and authentication, routing payments from consumer's bank to seller's bank, handling clawbacks, etc. At world scale it's got to be a huge engineering problem.

Yes the settlement happens almost instantly even for international transactions. It’s the bank that allows the transaction or not; not the payment network.

This is not the usage of the word "settlement" which prevails in the financial industry, which tends to use it to describe the transfer of funds to give effect to a promised transaction. It is factually not the case that credit card payments generally settle instantly. It depends on many factors but typical timelines are a few days to about a month, largely dependent on which network is at play and where the business getting paid is. (For complex reasons, prevailing settlement times in some countries are long compared to most HNers expectations.)

People should only be borrowing money to spend on productive capital. If you're not investing borrowed money into something more profitable than the interest, what you're actually doing is falling into a hole. We should be helping people who are falling into holes, not exploiting them.

I have never used a credit card to borrow money. I've always just used one as a basically a more secure and convenient debit card.

Credit cards to me are just convenient payment facilitators for money I already have. If they aren't being used that way, they probably shouldn't be used at all.

Do you pay off the card the second you spend the money? Or wait until your billing statemen? Most people borrow with credit cards and in fact I pay as late as possible for the statement to arbitrage the interest difference between the 0% of the card for the first 30 days and the interest I can draw in the bank. I try to delay big purchases to the very beginning of the billing cycle as that's an extra month to earn interest before paying it.

Just put it on autopay. Once a month the whole balance gets paid off.

Does your arbitrage strategy really make enough money to make it worth it? Personally, I am not going to stress about a few extra bucks by leaving the money in a 3% HYSA for an extra week. That kind of micro-optimization is fun for some people but I just can't be bothered.

I mean it doesn't take me any more or less time to pay it one day vs the other. Why not make basically an extra free $60/yr if you're carrying aroudn $2k in balances? For the median worker that's basically an extra couple hours of wages for no difference in workload.

Yeah, that makes total sense. For me, the extra mental of thinking about when to charge something and when to pay it off just isn't worth $60/yr.

Counter-factually: If autopay didn't exist, I would gladly pay $5/mo to have all my bills paid automatically.

I’m in the same boat.

I’d love to care about $60/year, but I waste more money on under-utilized subscriptions. Not saying it’s an either-or, but if I can work to earn $60 more, I’d probably rather do that than save $60. :-)

> in fact I pay as late as possible for the statement to arbitrage the interest difference between the 0% of the card for the first 30 days and the interest I can draw in the bank. I try to delay big purchases to the very beginning of the billing cycle as that's an extra month to earn interest before paying it.

No where near enough payoff for the mental gymnastics. I just pay the bill when I first get it and it is completely off my todo list.

So are you against giving people of limited means a way to shift part of the purchase cost of a necessary replacement item into the future? As a concrete example, it seems entirely reasonable to me for someone of limited means to spend something like $2,000 on a credit card to repair a broken car so that they are able to get to their job. If you don't give people a legal means to access money like that (even if the rates are borderline usurious), I would expect them to seek out illegal methods -- and that seems worse all around for society.

Not American, but giving one of your country's credit cards to someone too poor to pay for vital car repairs is just throwing them into the street with extra steps. What that person needs is public aid that gets them out of the hole.

Politician A: I will increase aid to poorer people to get them out of the hole. I will need to increase taxes.

Politician B: I will increase access to credit to poorer people to get them out of the hole. I will not need to increase taxes.

Voters will go for B every time. See taxpayer subsidized loans for home purchases, education, small business, etc.

Are you agreeing with me? State-subsidised loans are the first example of state aid I was thinking of.

Taxpayer funded loans inevitably lack the requisite underwriting, and hence turn into subsidies to the businesses that the loans are eligible to pay, hence allowing them to increase price.

See higher education and home prices in the US.

Having most people be leveraged to the max, using their own children’s future tax payments, is great for employers who want workforces with less negotiating power.

Proper state aid would be cash, or giving people houses and education. Not chaining them with debt to pay for houses and education.

Not at 24% APR.

What about borrowing money to pay for transport to a new job? Not ‘productive capital’, but probably worth it. There are lots of cases that don’t fit into your narrow category, where credit makes sense.

That is productive capital. A car or your payment of rent for someone else's offer of transport to you is akin to say paying for a milling machine that creates widgets.

I said 'transport', not 'buying a car'. Many people take the bus or other transport to work, especially when coming off a period of joblessness.

Yeah that's why I also said transport.

But that portion of your reply didn't address the fact that a bus ticket isn't 'productive capital'.

It is.

>"Capital is a broad term that can describe anything that confers value or benefit to its owners, such as a factory and its machinery, intellectual property like patents, or the financial assets of a business or an individual."

https://www.investopedia.com/terms/c/capital.asp

A bus ticket is something "that confers value or benefit to its owners".

That's not what capital means. The bus ticket is an everyday expense that doesn't bring you anything by itself long term, you stop owning it as soon as you use it. Otherwise food would be capital too and the word would become useless.

Thought experiment: why is a one month software license to operate a conveyor belt to move product stock considered productive capital, but not a one month license for the employee to ride to the product stock. Indeed in at least one city I lived in, the taxes were deducted from my transit pass as the state counted it as a capital expense for my employment (technically the pass was not supposed to be used for anything else, but no one is checking).

In the grim thought slavery still existed, I would say food would be considered productive capital. In modern day (from the view of the company) that value is just captured in the wage so it would be inappropriate to double account it into capital expenses (a business lunch I think would count though).

Software licenses are not considered capital; they’re expenses. This is why they’re preferred for tax reasons, as expenses are fully written off in the first year, but capital purchases are gradually depreciated.

In that situation, food would still be an expense. The capital would be the slaves. Weird example though.

There's a huge gap between regular consumer items and what you call productive capital.

For example, a land with a house is productive capital, because it insures you against rent hikes. A reliable car is productive capital, because it lets you commute to the job and insures you against switching to jobs with a worse commute.

But those things both cost so much more than you can (or should) put on a credit card, generally.

We always have a surplus of officious busybodies who love to tell others how to spend their money. I mean you're not wrong, but most people don't want to listen to personal finance advice and only learn as a consequence of making their own mistakes.

> What would happen is there would be no credit cards for anyone. Nobody is going to lend money to the general public at 5% for unsecured debt.

What is the rate of (sorry, I don't know the correct term) how often current credit card companies get "shafted"?

aka somebody runs up a $10,000 balance or whatever and then doesn't pay it

Here is the data for credit card delinquencies from the Fed: https://fred.stlouisfed.org/series/DRCCLACBS

Is 'rate of default' the term you are looking for?

What there really needs to be is a lifetime payback cap. 20% interest would be fine if you had say a maximum payback amount of 2-3x the original amount adjusted for inflation. The companies can still make money, but it prevents a hole with no bottom.

The all could still keep growing in this case, just not at a higher rate than inflation once it hits the cap

Yes, but after the cap only the number grows, not the value.

> What would happen is there would be no credit cards for anyone. Nobody is going to lend money to the general public at 5% for unsecured debt.

Credit cards are a single product that serve a lot of different use cases simultaneously, and credit card issuers are able to profit off of most of those through different mechanisms. Not everyone carries a balance on credit cards, including some of the most lucrative market segments[0].

Furthermore, BNPL is an example of lending money to the general public at 5% (or less, in many cases) for unsecured debt. In that case they make their money back on fees for late payments.

[0] If you'd like an overview of how credit cards make money, this post from patio11 covers the basics: https://www.bitsaboutmoney.com/archive/how-credit-cards-make...

> In that case they make their money back on fees for late payments.

Not primarily accurate; several BNPL providers don't even have a late payment fee. BNPL manufactures ~25% APR debt out of 0% consumer contribution and ~6% merchant discount (interchange) which, since BNPL payments revolve very quickly, annualizes quite healthily. The primary source of revenue to the BNPL provider was historically keeping a portion of the discount for themselves; the rest compensates the capital provider, who is usually not the BNPL itself.

https://www.bitsaboutmoney.com/archive/buy-now-pay-later/

From this comes a fairly important realization that if you don't have a second party (the business) funding the cost of credit, or if the extension of credit is for a weighted average of longer than 3 weeks, it is in fact quite difficult to provide unsecured credit to the general public at ~5%.

I think what would happen is that collateral for credit cards would become commonplace

Which has a similar effect to the cards not being available. If you're renting an apartment and riding a bus to work, what exactly are you going to put up as collateral? Organs?

If you live in Massachusetts, you might be able to soon:

https://www.technologyreview.com/2023/02/03/1067768/massachu...

I was really holding out hope this would be a story about piano playing

That's called debit card. Limit is the money in your back account.

It’s not quite the same thing. Secured credit cards exist, primarily for people with bad credit. e.g. https://www.hometrust.ca/credit-cards/secured-visa-card/

Personally, I already keep hefty minimum balances to avoid monthly fees on bank accounts that allow me to waive credit card annual fees. They could use that as credit card collateral.

That’s much worse than interest rates for the vast majority (that don’t have any assets to put up or can’t afford to actually lose them).

And much lower limits.

Less credit is not zero credit. Plenty of cards offer stupid low introductory rates and excessively large credit limits.

Smaller credit limits + lower interest rates makes it much harder for people to become unable to pay.

I took out a 7 year unsecured 25k loan last year for 1.99%.

Today it’s 4.9% after the rate increases

Set it at 5% above a given base rate (fed rate, Bank of England rate, etc) and what’s the problem?

> Set it at 5% above a given base rate (fed rate, Bank of England rate, etc) and what’s the problem?

All the credit cards I've ever had do have a variable rate like you describe, though base+5% would be pretty good. I'd expect super low rate cards like that to have limited or no rewards (which can otherwise be substantial in the US).

I'm guessing part of the reason banks dont tend to go that low is that people that carry balances as opposed to paying off their bill every month are much higher credit risks.

there would just be less credit out there.

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