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Comment by sokoloff | Hacker News Reader

"What he is really saying is 'what's fair got to do with it?"

Huh? People who are "riskier" paying higher rates and fees IS fair. Would you lend your (presumably hypothetical) deadbeat, drug-addled uncle your entire $100,000 retirement nest egg at the same rate and terms that you'd lend the US government?

Why the hell not?! He's family, and these big mean credit card companies are profit-seeking arms-length lenders, and you would expect them to act morally better (by your standard, not mine) than you would to family? (I would neither expect, nor as an investor, wish for them to do that.)

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I'm sure that paying a premium to borrow money once you are a credit risk would be considered "fair" by many. But, the example that you've posed is a straw man. Of course you'd charge a drug addict higher interest than the the US government.

The problem with credit card companies is that they loan the initial money at one price, and then adjust the price dependent on changing credit scores, insurance claims or whims.

And, a large percentage of a credit card companies, profit isn't in the initial interest rate. The profit is made in late fees, over limit fees and credit rate increases. So, they have a vested interest in the customer defaulting, being late in their payments or in going over their limit. And, when those fees are assessed, the customer generally has little recourse.

I agree with you vastly more than I disagree, but will observe that if you manage your debt reasonably, you have the ultimate recourse when your CC company changes your terms: Fire them. Pay that debt off, possibly by borrowing from another company willing to extend you terms more to your liking.

I agree that people to whom no one will lend more money are at a great disadvantage. I don't see any way to fix that, as preventing CC companies from offering variable APR offers in the future will likely make things worse for marginal customers; it will just make the companies completely unwilling to extend them credit. Embargoing consumers who are already suffering doesn't help them in the short term.

Unfortunately, if you "fire" your credit card company by paying off your balance and canceling the card, you also reduce your credit score, leading to potentially worse terms for your next loan.

As stated in the original article, the second-worst kind of credit card user from the issuer's POV is the one who immediately pays down their balance each month, without ever incurring interest or late-payment fees.

This is possible only because of the altogether too-cozy relationship between the credit rating agencies and card issuers. I think any regulation of the lending industry should start with the credit rating agencies, and move on to the banks only after they've established effective oversight and consumer protection in that space.

(Incidentally, my disgust with the normal lending practices in the credit card market is the reason that the only one I will carry is a small-limit emergency card issued by my local credit union. Since they're a member-owned not-for-profit institution, I have far more trust in their desire to serve my financial needs, rather than trying to screw me over for a buck.)

Pay the balance down to zero, and because of the strange quirk in the FICO scoring system, stop using it, but don't close the account. "Problem" #1 solved.

That strange quirk in the FICO scoring system sounds a lot like coercion to participate under threat of financial harm, i.e. extortion.

Who says you have to cancel the card? Just don't use the thing.

I certainly agree about managing debt reasonably. I also agree with changing companies. The practices are industry wide, however.

That explains why they do it, not why it's fair.

I'm not sure exactly how to demonstrate the fairness to you if you don't see it in the above hypothetical case, esp if you agree that you wouldn't "lend" your entire retirement to a poor credit risk individual. I'll take one more shot at it:

In order to attract prudent capital to a riskier investment, the projected rate of return must be higher than that of any available safe, or safer, investment. IOW, to lend to "high risk" customers, the credit card company has to charge some form of higher fees or rates. If they don't elect to offer lower rates to the "low risk" customers than those that they have to charge the high-risk customers, then someone else will come along and cherry-pick the low-risk customers.

Said only slightly differently, why would anyone choose invest at arms-length in something riskier if there were a safer alternative available with an equal rate of return? They wouldn't, and any attempt to compel them to do so via regulation is unlikely to produce a result that you'd be happy with. It will either dry up credit for everyone, dry up credit for only the riskier potential patrons, or result in #1, followed by the demand for changes to the bankruptcy laws to enable creditors to safely lend at the mandated terms to all comers. I doubt that any of those will be a net benefit to society, except possibly the second, which would still result in extreme short-term pain to lower economic status individuals, who are disproportionately represented in the "high risk" cohorts of the market.

You are explaining why the lender makes more money by doing X or why they cannot possibly survive without doing X or why it is financially prudent or their fiduciary responsibility....

That has nothing to do with fair. At least not a definition of the term outside of the rules of the market. If you define fair as 'legal' or 'in keeping with free market economics' then sure, it's fair.

Perhaps it would be helpful to propose some alternative situation-specific metric of fair to help me understand what you're not understanding about what I'm saying. To you, how would you define "fair" so as to create a stable system in a way that's fundamentally different from "in keeping with free market economics"?

In a free market of lenders and borrowers, "fair" is whatever each party agrees to enter into acting in their own best interest. If the lender thinks the terms are "unfair" to them, they don't lend. If the borrower thinks the terms are "unfair" to them, they do not borrow. Therefore, if a lender lends to a borrower, both parties have agreed that the deal is "fair".

If a borrower finds that no one will lend to them on terms the borrower likes and then freely decides to loosen their standards and borrow anyway, I don't see any unfairness at work, rather that the borrower has updated their own concept of what a "fair deal" is, in order to borrow the money they want.

Try this.

He is talking about statistically risky groups. Someone who has had >X accidents (regardless of fault) is statistically riskier to insure to drive. As are males between certain ages. I'm sure you could find all sorts of links between ethnic affiliation, schooling history, level of education that identify individuals as statistically riskier to loan to.

These all pass his (& your) fairness test. IE, you make more money (or lose less) by not lending to them, or lending at higher rates. It passes the market test. For the individual who gets told that Mongolians from Sweden pay an extra 3% if they where shiny shoes, it may seem unfair.

Your use of "fair" (whatever each party agrees to enter into acting in their own best interest) is the same as saying 'what's fair got to do with anything.' By your definition, price gouging is fair. Monopolies are fair (unless you want to mark your definition of fair to conventional free market wisdom pretty pedantically). There is no such thing as unfair or obusive practices.

Fair is unnecessary to describe the ethical world you are referring to. Coercive/noncoercive will suffice.

In this case you agree with me on all but semantics: 'what's fair got to do with it? Free markets dissolve the concept.

That's helpful in explaining your and my disconnect. I suspect that you are I are pretty much talking to each other at this point, which is more than fine with me, as I find it quite interesting.

> For the individual who gets told that Mongolians from Sweden pay an extra 3% if they [wear] shiny shoes, it may seem unfair.

It may seem unfair to that person, but if it's wrong (meaning not borne out by the facts/stats), then another insurance or credit card company will almost surely come along and offer Swedish Mongolian shiny-shoe wearers deals at par, or even at a discount, to what the 3% surcharge company offers. In other words, if a company significantly overprices a given risk, that's just bad business or bad judgement, but it's not unfair. Similarly, if they underprice the risk, that's also not unfair, just bad business/judgement. Wherever significant price deviations are present and leaving money on the table, a competitor will come in to address the consumer need. And if they don't, then that's just the market price, which to me is the fair price.

So I think I agree with your assesment that in my mind fair is a synonym, or at least an extremely close analog, to non-coercive.

What you call price "gouging" (such as increasing the price of food, water, or gasoline in a time of shortage), I call an efficient market allocating scarce resources to those in the greatest need (as demonstrated by being willing to pay the highest price). If you mandate that the price of gasoline be $1.00 in the weeks following Katrina, how much gasoline do you think will get sold? Almost none would be my prediction. Instead, you'd find massive hoarding and gas stations closing rather than selling gas at a loss. How does that help anyone?

Instead, if you let the price float to $5, $6, then those who need gas will buy it; those that don't will have no incentive (in fact a disincentive) to hoard it, and those who might be just driving around aimlessly for amusement will temporarily stop doing that, conserving that very limited resource. Seems VASTLY more efficient to me, and seems perfectly fair as well.

Similarly, if you arrive at a monopoly through market forces, I think that's perfectly fine. If you are AWARDED a monopoly by the state, then that monopoly must be a tightly regulated monopoly by that same state. But I don't see any reason why Google shouldn't be allowed to reap the rewards of conquering search if they eventually do so. Or why Virgin Galactic couldn't operate a de-facto monopoly on space tourism, or any other example of where a market-derived monopoly is inherently unfair. To me, the state taking away an earned monopoly is what would be unfair.

I have really enjoyed our discussion, though I suspect we're at the point of understanding pretty well what each other is saying and probably unlikely for you to agree that $5-$6 gas is "fair" post Katrina, and for me to think it is, and agree to disagree after a thought-provoking discussion.

All right then -- fair to whom, and by what standard?

By whatever standard. But saying that it is fair because it complies with the free market assumes that the free market is a sufficient measure of fairness. So 'fair' becomes a meaningless term really. Like saying I like to eat tasty things or I'm rich because I have lots of money.

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