Fezmid Posted May 8, 2009 Posted May 8, 2009 "The bill would charge credit card companies a 30 percent surtax on income from interest exceeding 15 percent." http://www.startribune.com/politics/state/...D3aPc:_Yyc:aUUX I guess I don't understand how the state can tax a credit card company.....?
Magox Posted May 8, 2009 Posted May 8, 2009 "The bill would charge credit card companies a 30 percent surtax on income from interest exceeding 15 percent." http://www.startribune.com/politics/state/...D3aPc:_Yyc:aUUX I guess I don't understand how the state can tax a credit card copmany.....? It doesn't surprise me. With all the loss of tax revenues that each state is going through, it is only a matter of time that politicians will look to generate added tax revenues through other channels. Since the country is starting to shift to the left, I would expect many of these bills to get passed moving forward. There is a strong push from politicians to deter these credit card companies to limit their high interest fee's. Of course the credit card industry is getting battered right now, and most likely will face a very tough road ahead. The credit card industry in my view, will be the next shoe to drop. With unemployment getting worse, with very few prospects of it improving any time soon, this will be a major weight on the industry, as you will see defaults continue to rise, so I do understand why they are charging higher interest charges. Off hand, I am not opposed to surtaxing them on the interest earned over 15%. But then again, sometimes these decisions, specially decisions that are made from a populist point of view tend to backfire. I am absolutely against taxing upper income earners at a higher rate, as I believe that could have a big, negative impact on growth in the future. In regards to additional taxes on alcohol and tobacco, I am not opposed to it. These products contribute to killing people, and anything that makes it more difficult to obtain these products, specially if it adds revenues to the state, I'm all for it!
KD in CA Posted May 8, 2009 Posted May 8, 2009 How do they do it? Simple. Force the companies to create all the systems and hire all the manpower to calculate the new tax. Thus a large portion of the true cost of this idiocy will be hidden. Of course, the card companies will simply up the annual fee and restrict credit even more in response, but I'm sure that won't impact the decisions of the geniuses in MN.
Magox Posted May 8, 2009 Posted May 8, 2009 How do they do it? Simple. Force the companies to create all the systems and hire all the manpower to calculate the new tax. Thus a large portion of the true cost of this idiocy will be hidden. Of course, the card companies will simply up the annual fee and restrict credit even more in response, but I'm sure that won't impact the decisions of the geniuses in MN. I would guess that would be one of the likely responses from the credit card companies, if a bill of that sort were to go through. The dilemna is twofold. One, are the tax revenues, if they don't generate enough money, then obviously there will be budget shortfalls, and that would mean less money for education, state jobs and etc. The other problem is the populist backlash against the "evil" credit card companies. After all they are politicians, and in order to keep their job, they have to be elected. People are losing jobs, savings, homes etc. So the anger out there is alive and kicking. It's a difficult problem. I do not like the idea of additional taxing, but I am a realist. There are two ways to pay a deficit, you either cut spending or you generate more revenues (taxes). I don't know how we are going to generate more revenues through the statis quo means of taxation, since tax receipts are down drastically and expected to remain low for the forseeable future. I would imagine that new taxes will be implemented in the next couple years, that is JMO.
DC Tom Posted May 8, 2009 Posted May 8, 2009 I like this in principle, because I hate scumball credit card companies that charge 28%. They should be punished. In practice...that tax will just be passed on to the consumer. "If your interest rate is above 15%, we have to charge you an extra surcharge of 1% of your credit limit every month." The MN legislature may as well just raise income taxes by five percent - easier and cheaper to implement, for largely the same effect. I don't know how we are going to generate more revenues through the statis quo means of taxation, since tax receipts are down drastically and expected to remain low for the forseeable future. I would imagine that new taxes will be implemented in the next couple years, that is JMO. Because of the repeal of Glass-Steagall, no less.
Acantha Posted May 8, 2009 Posted May 8, 2009 I like this in principle, because I hate scumball credit card companies that charge 28%. They should be punished. My opinion, the people who use credit that charges 28% interest should be punished (and I suppose they are, by paying that much), not the company offering it. The MN legislature may as well just raise income taxes by five percent - easier and cheaper to implement, for largely the same effect. The same effect to MN, but as someone who doesn't have credit card debt, I'd rather have the people who are living beyond their means get the brunt.
Fezmid Posted May 8, 2009 Author Posted May 8, 2009 The same effect to MN, but as someone who doesn't have credit card debt, I'd rather have the people who are living beyond their means get the brunt. I agree in principle... But the people living beyond their means are the mean who can't afford to keep living beyond their means... Kinda like the interest-only loans for houses. MN is making things worse, not better... Glad I don't live in the state!
Acantha Posted May 8, 2009 Posted May 8, 2009 I agree in principle... But the people living beyond their means are the mean who can't afford to keep living beyond their means... Kinda like the interest-only loans for houses. MN is making things worse, not better... Glad I don't live in the state! So wouldn't this be another way to get people off credit? I'm a "less taxes, less government" person, so I'm really not condoning it one way or the other, just saying that I don't have any sympathy for people who put themselves into these holes.
IDBillzFan Posted May 8, 2009 Posted May 8, 2009 How do they do it? Simple. Force the companies to create all the systems and hire all the manpower to calculate the new tax. Thus a large portion of the true cost of this idiocy will be hidden. Of course, the card companies will simply up the annual fee and restrict credit even more in response, but I'm sure that won't impact the decisions of the geniuses in MN. But it's not a new tax on consumers, so that's a good thing!
Fezmid Posted May 8, 2009 Author Posted May 8, 2009 So wouldn't this be another way to get people off credit? I'm a "less taxes, less government" person, so I'm really not condoning it one way or the other, just saying that I don't have any sympathy for people who put themselves into these holes. I wouldn't think so -- you really think the people who carry a balance on a high-interest credit card care if it's 25% or 35%? At that point, it's all the same - a TON.
Tcali Posted May 8, 2009 Posted May 8, 2009 "The bill would charge credit card companies a 30 percent surtax on income from interest exceeding 15 percent." http://www.startribune.com/politics/state/...D3aPc:_Yyc:aUUX I guess I don't understand how the state can tax a credit card company.....? easy. interest income from usurious rates is taxed . Would be easier to just outlaw that level of interest.But that would make too much sense.
Tcali Posted May 8, 2009 Posted May 8, 2009 My opinion, the people who use credit that charges 28% interest should be punished (and I suppose they are, by paying that much), not the company offering it. The same effect to MN, but as someone who doesn't have credit card debt, I'd rather have the people who are living beyond their means get the brunt. Not so simple. Many business owners use lines of credit from credit cards. The CC companies are now squeezing them with usurious rates. These aren't people living beyond their means. These are people who have businesses to run and need lines of credit to keep cash flowing to make payroll etc. when there are delays in payment for their products and services. these lines are also used for business expansion when outlays will exceed income for a year or two.
Fezmid Posted May 9, 2009 Author Posted May 9, 2009 Not so simple. Many business owners use lines of credit from credit cards. The CC companies are now squeezing them with usurious rates. These aren't people living beyond their means. These are people who have businesses to run and need lines of credit to keep cash flowing to make payroll etc. when there are delays in payment for their products and services. these lines are also used for business expansion when outlays will exceed income for a year or two. I would hope those people would be getting LOANS and not using credit cards....
Acantha Posted May 9, 2009 Posted May 9, 2009 I would hope those people would be getting LOANS and not using credit cards.... I was thinking the same, but even if they did use cards, I don't see the difference, which may come from a complete lack of experience running any kind of business. Are business loans generally that much higher interest? It seems to me the same rules would apply; either you're a good risk or a bad risk. If you're a good risk (living within your means) you're getting a good rate of interest. If bad, you're not. Maybe you're not out there buying plasma's and new cars, but you're still taking the extra interest hit because you're spending beyond a reasonable limit (compared to your income). And in that case, you take what's available.
Fezmid Posted May 9, 2009 Author Posted May 9, 2009 I was thinking the same, but even if they did use cards, I don't see the difference, which may come from a complete lack of experience running any kind of business. Are business loans generally that much higher interest? It seems to me the same rules would apply; either you're a good risk or a bad risk. If you're a good risk (living within your means) you're getting a good rate of interest. If bad, you're not. Maybe you're not out there buying plasma's and new cars, but you're still taking the extra interest hit because you're spending beyond a reasonable limit (compared to your income). And in that case, you take what's available. Business loans are generally much LOWER than that! Here's a site with examples: http://www.scruzccu.org/rates/business-english.shtml And a business with debt is actually a good thing, if within reason. You want your business to be well leveraged, but not so much that they're not making money on the loans. I didn't quite get it (and still don't get it 100%), but my wife explained it to me when she was going through grad school to get her MBA. Here's a decent Wikipedia entry about it: http://en.wikipedia.org/wiki/Leverage_(finance) "Financial leverage (FL) takes the form of a loan or other borrowings (debt), the proceeds of which are (re)invested with the intent to earn a greater rate of return than the cost of interest." So in essence, you take your loan at 5% and invest it into the business as a means to make more than 5% back.
Tcali Posted May 9, 2009 Posted May 9, 2009 I was thinking the same, but even if they did use cards, I don't see the difference, which may come from a complete lack of experience running any kind of business. Are business loans generally that much higher interest? It seems to me the same rules would apply; either you're a good risk or a bad risk. If you're a good risk (living within your means) you're getting a good rate of interest. If bad, you're not. Maybe you're not out there buying plasma's and new cars, but you're still taking the extra interest hit because you're spending beyond a reasonable limit (compared to your income). And in that case, you take what's available. I was trying to explain the difference last post. MANY small businesses use lines of credit from credit cards...for many reasons. The main ones are ease of access and lower interest rates than the banks offer at their branches on business loans. Most business people don't want to kiss a bank branch's backside every time they need business capital. --The very recent difference is that the credit card divisions are now arbitrarily and brutally raising interest rates and decreasing credit lines and adding fees--even on people with excellent credit and long histories with their lines of credit. The reason--I believe--is a panic and last minute money grab by execs afraid of not getting their huge bonuses. They see this present climate--and many of them want out--but they want their bonus packages first. Screw the small(and big) businessman who has perfectly good credit and pay on time.Those guys are making decisions for the short run. Sound familiar?? -Traditional business lines of credit of course have been offered through the banks in the past: But with enormous hoops to run through---And these lines are getting harder and harder to get-no matter how many billions we throw at the banks.-Again the execs wanting their millions before they scurry off like rats into the night.
DC Tom Posted May 9, 2009 Posted May 9, 2009 --The very recent difference is that the credit card divisions are now arbitrarily and brutally raising interest rates and decreasing credit lines and adding fees--even on people with excellent credit and long histories with their lines of credit. The reason--I believe--is a panic and last minute money grab by execs afraid of not getting their huge bonuses. They see this present climate--and many of them want out--but they want their bonus packages first. Screw the small(and big) businessman who has perfectly good credit and pay on time.Those guys are making decisions for the short run. Sound familiar?? The interest rate on my Discover Card is 29%, and I pay it off religiously every two weeks. In fourteen years, I've never carried a balance. When I asked them why it was so high, they told me "because you pay it off religiously every two weeks, and in fourteen years have never carried a balance month-to-month." The reason they raise rates on people with good credit is simply that people with good behavior w/r/t credit cards rarely make credit card companies any money. Hell, the way I manage my credit, Discover pays me about $300/year to use their card. I can't blame them for hoping to get some of that back (which, of course, they never will. Not at 29%. Just because I don't blame them for trying, doesn't mean I'm stupid enough to pay that much in interest.)
Tcali Posted May 9, 2009 Posted May 9, 2009 The interest rate on my Discover Card is 29%, and I pay it off religiously every two weeks. In fourteen years, I've never carried a balance. When I asked them why it was so high, they told me "because you pay it off religiously every two weeks, and in fourteen years have never carried a balance month-to-month." The reason they raise rates on people with good credit is simply that people with good behavior w/r/t credit cards rarely make credit card companies any money. Hell, the way I manage my credit, Discover pays me about $300/year to use their card. I can't blame them for hoping to get some of that back (which, of course, they never will. Not at 29%. Just because I don't blame them for trying, doesn't mean I'm stupid enough to pay that much in interest.) Thats a bit simplistic. People with poor payment patterns get dinged with huge interest rate increases all the time. Discover was always notorious for it ridiculous interest rates. Its not because you have such a good paying pattern . If you just made the minimum payments your interest would not go down.
Fezmid Posted May 9, 2009 Author Posted May 9, 2009 The reason they raise rates on people with good credit is simply that people with good behavior w/r/t credit cards rarely make credit card companies any money. Hell, the way I manage my credit, Discover pays me about $300/year to use their card. I can't blame them for hoping to get some of that back (which, of course, they never will. Not at 29%. Just because I don't blame them for trying, doesn't mean I'm stupid enough to pay that much in interest.) That's not true though -- they are making money off of you, from the vendors. Everytime you use your card, Discover gets a percentage of what you charged. That's why some smaller shops give a discount for using cash - because it's cheaper for them. I have a Visa card I've used for years similar to yours (except that I only pay it off once a month instead of every other week) -- and the interest rate is 8.9%.
Magox Posted May 9, 2009 Posted May 9, 2009 Meredith Whitney was a banking analyst for Oppenheimer & Co. And in my view, she has been the best analyst along with Mike Mayo running a close second to cover this industry over the last couple of years, much better than that goofball Dick Bove. She's a very bright lady, and recently went on to open up her own advisory group. She recently has switched her focus from mortgage losses to credit card losses and the impacts it will have on the real economy. She does address credit card ability, or lack of I should say, she also talks about some of the potential pitfalls we may encounter when politicians get involved, in the article from the WSJ that I provided down below. It's a great read. Very informative. http://online.wsj.com/article/SB123664459331878113.html Credit Cards Are the Next Credit Crunch Washington shouldn't exacerbate the looming problem in consumer credit lines By MEREDITH WHITNEY Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is underappreciated is the role of credit-card availability in that spending. Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon. While those numbers look small relative to total mortgage debt of over $10.5 trillion, credit-card debt is revolving and accordingly being paid off and drawn down over and over, creating a critical role in commerce in America. Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010. Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines. There are several factors that are playing into this swift contraction in credit well beyond the scope of the current credit market disruption. First, the very foundation of credit-card lending over the past 15 years has been misguided. In order to facilitate national expansion and vast pools of consumer loans, lenders became overly reliant on FICO scores that have borne out to be simply unreliable. Further, the bulk of credit lines were extended during a time when unemployment averaged well below 6%. Overly optimistic underwriting standards made more borrowers appear creditworthy. As we return to more realistic underwriting standards, certain borrowers will no longer appear worth the risk, and therefore lines will continue to be pulled from those borrowers. Second, home price depreciation has been a more reliable determinant of consumer behavior than FICO scores. Hence, lenders have reduced credit lines based upon "zip codes," or where home price depreciation has been most acute. Such a strategy carries the obvious hazard of putting good customers in more vulnerable liquidity positions simply because they live in a higher risk zip code. With this, frequency of default is increased. In other words, as lines are pulled and borrowing capacity is reduced, paying borrowers are pushed into vulnerable financial positions along with nonpaying borrowers, and therefore a greater number of defaults in fact occur. Third, credit-card lenders are currently playing a game of "hot potato," in which no one wants to be the last one holding an open credit-card line to an individual or business. While a mortgage loan is largely a "monogamous" relationship between borrower and lender, an individual has multiple relationships with credit-card providers. Thus, as lines are cut, risk exposure increases to the remaining lender with the biggest line outstanding. Here, such a negative spiral strategy necessitates immediate action. Currently five lenders dominate two thirds of the market. These lenders need to work together to protect one another and preserve credit lines to able paying borrowers by setting consortium guidelines on credit. We, as Americans, are all in the same soup here, and desperate times are requiring of radical and cooperative measures. And fourth, along with many important and necessary mandates regarding fairness to consumers, impending changes to Unfair and Deceptive Acts or Practices (UDAP) regulations risk the very real unintended consequence of cutting off vast amounts of credit to consumers. Specifically, the new UDAP provisions would restrict repricing of risk, which could in turn restrict the availability of credit. If a lender cannot reprice for changing risk on an unsecured loan, the lender simply will not make the loan. This proposal is set to be effective by mid-2010, but talk now is of accelerating its adoption date. Politicians and regulators need to seriously consider what unintended consequences could occur from the implementation of this proposal in current form. Short of the U.S. government becoming a direct credit-card lender, invariably credit will come out of the system. Over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool. For example, 90% of credit-card users revolve a balance (i.e., don't pay it off in full) at least once a year, and over 45% of credit-card users revolve every month. Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. In fact, a relatively small portion of U.S. consumers have actually maxed out their credit cards, and most currently have ample room to spare on their unused credit lines. For example, the industry credit line utilization rate (or percentage of total credit lines outstanding drawn upon) was just 17% at the end of 2008. However, this is in the process of changing dramatically. Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively. Ms. Whitney is CEO of Meredith Whitney Advisory Group, LLC.
Recommended Posts