Would You Use A Government-Issued Credit Card?
With President Obama and Congress threatening to tag-spank credit card issuers, Slate is left wondering why the government doesn't just issue its own credit card. Before you scream "SOCIALISM!," consider the government's heavy involvement in the banking sector, not just through the recent bailouts, but through long-standing institutions like Fannie and Sallie Mae, and Freddie Mac. Credit-worthy borrowers in Germany, France, and India all have access to low-interest, no-fee credit cards issued by their central banks. Would you ever be interested in an Obama-backed credit card?
Creating a government-sponsored lending agency-a Fannie Mae for credit cards-would rein the whole system in. For one thing, it would offer lower rates than the usual 18 percent. The government could charge, say, 8 percent interest and still turn a profit. It would include none of the usual hidden fees or surprise charges. (In 2007, penalty fees were $7.5 billion, cash advance fees were $5.6 billion, annual fees were $4.6 billion, and interchange fees were $23.6 billion.) And while the credit card industry spent $34 billion on marketing in 2007, the government would avoid that expense entirely. The card would theoretically be accepted everywhere, because merchants would know Obama is good for it.
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Hmmm...a credit card that won't be bankruptable (as federal student loans are not now) issued by a lender who can garnish my wages if I don't pay? No thanks.
The problem is that Fannie Mae doesn't lend directly, they buy or underwrite loans that other banks write. Extending that to the credit card model, the government would buy or guarantee credit card debt at a low rate, but the banks could still charge various fees.
Of course, if it's designed correctly, then the banks that took advantage of the program could be required by contract (must stronger legal support than law, actually) to limit fees and rates.
Banks kind of deserve it. However there is not the inherent problem of monopoly like cable companies. There are already credit unions and small banks to go to. As far as credit cards companies go, people accepted being treated like crap for I don't know what reason.
All we need is Barney Frank to get in there and take any personal responsibility away from granting credit. It would end up being a costly mess, with all kinds of social initiatives.
problem is that one credit company is chosen over another by the consumer for things like interest, rewards, etc.
if there was one government run credit card, they'd have no incentive to offer better perks, interest, anything than any other company.
The article asks how the government would get in the business, would it use the Visa or Mastercard system? Or start its own?
I think if they did it, all they have to do is use one of the banks they take over or are bailing out. They could just tell the bank what to change. Lower the rates and eliminate the "gotcha" fees. They would have to replace the leaders, because I fear those there now would have no concept of fairness.
I'll take a pass on any credit card. But, makes you wonder if a government issued card with low or no fees force CC companies to stop the gouging.
Actually, knowing them they would cry foul and sue ala what big name high speed companies are doing against towns starting their own high speed service.
"Oh noez we can't compete when the consumer is treated fairly!"
SOCIALISM!
(sorry, I just wanted to be first)
Hey, if it's structured so that market-based alternatives can compete fairly, it'd be a win for consumers. It wouldn't be sexy, it would be utilitarian and it'd probably have relatively low limits. But it'd provide a good baseline, no-frills alternative. Private card issuers could compete with more offerings or better service and everyone wins.
I'd want to have sensible limits on who's eligible, though: no sub-prime borrowers (or low limits and/or security deposit and/or education as part of the bundle.
And, every year, any outstanding, overdue balances are deducted from tax refunds, where applicable.
@Trai_Dep: Darn. First to scream "Socialism" but I see that somebody already beat me to shrilly screeching "Barney Frank!"
I agree with you Trai on the no frills idea of a credit card. So it's the credit card that Consumerist constantly preaches to take oversees when you travel or to save for emergencies. It helps builds a baseline credit and has built in limits to prevent people from building up silly amouns of debt.
But I still say cards won't compete. They will cry foul. We all know their entire earnings portfolio is based on gouging the consumer on fees and penalties.
Btw..LOl what do you say is a "sexy" card?
Horrible idea. The Government has no business getting into the credit card business. There isn't even a real social policy argument behind it, like there is for FHA-backed home loans and guaranteed student loans. With FHA-backed Home Loans, the government is assisting lower-income individuals with buying a home, which can be good in certain circumstances (helps them build equity, etc.). With student loans, the government is encouraging people to get an education, which is really an investment in the future of the country. What would the government be encouraging by providing credit cards? Frivolous spending of money that people don't have on things they probably don't need or can at least live without?
@rugman11: If you can't pay, you shouldn't have gotten it in the first place, or maybe realized you shouldn't spend more then you earn.
The banks would HATE this so I think I like it. As long as the banks were forced to compete, and deadbeat borrowers couldn't find a loophole, it sounds like it could potentially (i.e., show me a detailed model first) work.
@Jonbo298: Wow, way to completely miss my point. Why would someone want a credit card where they have no leverage with the lender and could potentially be jailed for defaulting?
Anything that makes crooked businesses squeal is fine by me. Competition is good, but what we have now isn't competition.
Revelation 13:17: And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.
No, and here's why....
Say you have a nice low 6% interest rate on the NatCard. Congress comes along and says 'we need to raise money for _____, we can do that by tacking on a paltry .25% on the NatCard interest rate'. Ok, now you're up to 6.25%, but the cow's out of the barn now. Next session, well they did it, we can do it. Next thing you know you're up to 12% because of folks screaming 'think of the children!'. Eventually private industry would come out with their own card to compete. They'd either have a lower interest rate or some other outrageous perk, but it would have to be good to take on the backed by the treasury pledge.
Another reason, there's no link now, but what about if nationalized health care comes to be? Suddenly you have a group that knows you purchased a box of Betty Crocker brownies on your NatCard and blames that for your diabetes, never mind that you made them for a school bake sale. So now your tier of payment for the national health plan goes up as your share of the obesity tax that came along with the program (to help pay for it).
Next up, we have a national purchasing database used by DHS to look for suspicious combos of items. I'm not saying they don't try to do that now, but if you were using the one card in town to buy nitrogen rich fertilizer you better own a pretty big farm or you've got some explaining to do.
@Esquire99: Of course you are right. We should be discouraging credit card use, not encouraging it.
Where would it stop? Why not groceries? Isn't food a basic human need? The government good buy grocery stores and save us a bundle!
It does go to show us how far the pendulum has swung. We could become the new Europe.
@rugman11: This would be my only concern with it. The unbankruptable issue with student loans does not work in the current state. In the situation of student loans there should be a few situations where they are dischargable. They should absolutely be vacationed for people in a severe financial difficulty until they are back on their feet. Having that same heavy handed situation on a credit card could be a problem. It isn't a matter of people refusing to pay but more likely medical disasters or other major life events that impact people's earning ability. Student loan is collecting on people on soc. sec. disability. I find that wrong.
@Crystal Wojcinski: If your entire business plan is built on gouging people there might be a flaw in your plan.
I have not had a credit card for decades specifically because of the games the banks play. If I could obtain a no frills card without the games I would give it serious consideration.
Like a lot of trial balloons, the devil (or any other favorite expression of nastiness) is in the details (as other commenters have said).
The concept sounds intriguing, but on the face of it, I'll pass.
@frank64:
Exactly. Where does it stop? If the government can do everything so efficiently, why not let them provide everything. Buy your US Govt. LCD TV, your US Govt. Cheerios and your US Govt. DVDs all with your US Govt. Credit Card. No need for private industry at all. But wait, how will people get money to pay for all of these things? Maybe it would be best if the govt. just handled the distribution of income as well, to ensure that everyone gets a fair amount.
@arstal: I know it doesn't seem like there is competition, but there are credit unions and small banks that are much better. They have higher standards, which is good.
I really think banks get away with these "gotcha" fees and rate hikes because people accepted them. Whenever I got hit with a late fee, I complain, and then complained and in one or two cases canceled. After I canceled they waived the fees and I agreed to reopen my account. You just have to say no.
If they made smart credit decisions they could make obscene profits already without the tricks to get people to pay extra. They just got real, real greedy.
My wife and I are 15 months away from paying down $25000 in unsecured debt (by the end it will have taken us 5 years to pay it off). I don't care if God himself came down and gave me a platinum card, i'm done w/ credit cards.
@rugman11:
I agree that this would be one of the worst ideas because of that reason. Credit cards are bad but at least you can get rid of the debt via bankruptcy but the government you will be in debt for the rest of your life. You thought credit card companies were bad wait until they know the only way out is death.
@bohemian:
Perhaps people shouldn't take on more student loans than they can afford to pay back. I don't feel bad at all for people that take on tens of thousands of dollars in student loan debt, without evening thinking about what it will take to pay it back later. Granted, some fault lies with the educational institutions (including High Schools) for failing to properly teach basic finance, but most of the blame falls on the borrower/student for failing to make a reasonable inquiry as to how much it's going to cost to pay back the loans. For the record, I do have student loans, very heavy ones ($150k), but I knew exactly what I was getting into when I signed on the dotted line (or, actually typed in my DOE PIN).
@Esquire99:
Lets see Fannie and Freddie have both had massive accounting scandals and HUD regulated both of them. The Washington post had an article that claimed that Fannie and Freddie were responsible for the subprime crises and we want to give them more power. If it was to help people that could not afford a credit card than it is bad (subprime loans crises) or if the government wants to put the credit card companies out of business than that is bad. I don't know why we want to emulate Europe being some countries have over %20 unemployment.
i'd have to know more info, but i'm def open to it...especially if it's better than my 7.99% or 8.99% cards.
better have some damn good rewards, though! hahaha
The rich would have to pay 30%, the very poor would get a rebate on the balance, the poor would only pay 2%. You would not have to pay an interest rate on food, medicine or a donation to charity. Any interest rate waived due to the above would be phased out for income above 100K. All minorities would get a 100 point FICO score credit.
my major concern about this is that banks (which, when not being bailed out with our $ are profit institutions) would be forced to compete against a nonprofit organization with the financial backing of being able to tax our income by force (the government). Basically, the government can burn cash and doesn't have to operate on profit motive, so it has an inherently unbeatable advantage against the rest.
i dont understand why one option is "SOCIALISM! SOCIALISM! SOCIALISM!"
It's like america that is a de-facto bad thing.
@menty666: I'd rather have Congress make that interest rate decision than have Bank of Screw-the-consumers. At least when Congress does it, they're accountable to the people. If my representative votes to increase my interest rate, I don't vote for him in the next election. If Bank of Screw-the-consumers increases my interest rate, my options are to take it or put a huge dent in my credit report, risking my ability to buy a house.
In other words, I'd rather vote with my ballot than with my wallet. Ballots were made for voting. Wallets weren't.
@frank64: My state already has a POS debit system for welfare and food stamps set up. It would be trivial to piggyback onto it.
How exactly would this work? Would the government partner up with a major issuer such as Visa/Mastercard/American Express or build their own transaction network?
@captainpicard: I felt the same way after paying off all of my credit cards, I wanted nothing to do with them again. Then I realized how convenient having one really was for traveling and such, and how I could keep my credit score healthy, so now I use a couple, but NEVER carry a balance just collect rewards from them. I has taken a lot more discipline this way, but I never spend money that I don't have, what is funny is that I realize how much more lavish my lifestyle was when I allowed myself to carry balances, when I don't, I examine every purchase carefully.
@bohemian: Credit unions usually offer good options. My credit union has one rate, no default rate, the rate has been the same for years. There is no annual fee and if you are late they only charge you a late fee after 29 days, and that fee is only $5, so if you goof, you have 29 days to make a payment before a fee hits. There is no over limit fee. The limits are usually conservative. If you run into financial problems, you can go to a branch and talk to someone and they will set up something that works for you.
@Esquire99: Oh, hey, good luck with the legal market! I don't think its that people go about taking out sums as large as yours without some idea of what they want to do. The problem is that college takes at least 4 years and in that time the economy can change a lot.
@frank64:
All minorities would get a 100 point FICO score credit.
LMAO... well played, sir. Well played.
And where's this idea coming from that there would be no fees? Has anyone seen the penalties the IRS charges for not paying your taxes?
@frank64: Oh, and abortions and birth control would be allowed to be charged if a Democrat is President and will be immediately disallowed as soon as a Republican is President.
@menty666: Um, actually, DHS already tracks purchases of larqe quantities of certain fertilizers. Because, really, there is NO other reason to have it other than living on a farm.
Think about this - your whole life can be figured out if you use a credit card extensively. Where you shop, what you buy, how much you buy, etc. So when the government takes over health care, and knows that you, Joe Consumer, are buying cigarettes or pizza with your credit card, wow...the implications are staggering. It's bad enough that grocery store cards store this data, but just handing over your life to our government is not a good idea.
I say partner with the big 4, or at least license their networks, and that way some money still goes into the private sector in the form of transaction fees. Heck, I'd like to see them all compete over the contract. This removes the government from having to set up and maintain the infrastructure to process said transactions.
@t3tsubo: Well the older generations grew up in a very black & white world. Russia was our enemy and the biggest threat to our country. It was taught to them that they and everything they stood for was the devil, and they said the same about us. For that reason, capitalism became one with Americanism, and socialism was Anti-American.
The AJC actually just had an interesting article about how that is losing its relevance in today's America. Hopefully as the baby boomers keep dying off we can start to live in a slightly more equal world without fear that the russians are infiltrating our society just because we are living up to our social obligation to help those less fortunate...
Oh, also, I'm all for a government credit card. They could perhaps use some of the interest to sustain social security or fund education.
well this would have been a better idea than dumping $700billion into the banks that gets paid out to counterparties et al.
The government could set their interest rates at whatever low rate they wanted to compete with banks, and anyone who doesn't pay the card gets the balanced tacked onto their IRS balance.
What would stop congress from increasing the rate? 1. competition with other banks, 2. legislation that prevents them increasing it beyond x basis above the fed rate.
I'm NOT saying the government should run it like a government dept, but buy up any bank (Amex, discovery etc) that go under, and use their assets and people to administer the bank.
Also frank64... Mastercard and Visa are just service providers, the government could just as easily use them. Amex and Discovery and Cap One are differnt in that they FUND the credit card as well (Visa and mastercard only process the transaction they don't hold the balance, the issuing bank does that), so the government wouldn't have to setup a 'new' system.
I personally fully endorse the idea of making EVERY purchase with a credit card. It makes little to no sense not to do so for a number of reasons, such as:
1. You get the CC company backing you up on every purchase. Massive benefit, and the most important. You essentially don't ever have to worry about getting screwed over by a shifty merchant...just reverse the charges and you're home free. This, in and of itself, is more than enough cause to use a CC to pay for everything.
2. It's important to pay off your balance every month, to not get hit with interest. Granted that you do, you leave your own money in an interest-bearing account a little longer, and make a little more money yourself.
3. Get credit cards that have cashback. I have a discover and a Mastercard that both have cashback. Or, you know, points or something else. Should never, ever use a card that doesn't give you an incentive to use it.
4. Credit score. Consumerist readers don't need any more schooling on this.
@HRHKingFridayXX:
I agree that the economy change during college, but the problem is people don't even take into account how much the payments will be, and what kind of salary they will need to make those payments.
@Esquire99: Some people, though, do take all of that into account. A friend of mine is an attorney - graduated law school in 2006. In 2007 she finished a clerkship and left to go to a rather nice law firm. In mid-2007, the law firm broke apart, downsized, and now she's out of a job. Then, the economy imploded.
In 2003 I knew a guy who got into a car accident and his insurance, essentially, bailed on him. Between being sued and suing the insurance company, he went six-figures into debt. Because of the physical injuries, he was out of work for several months and ended up losing his job. To get health insurance, he started working as a store manager at a store in the mall. He also had to file for bankruptcy -- which discharged his credit cards, but not the student loans he was paying on.
Sometimes, just sometimes, shit happens to people. Because we're human, we're not perfect, and when we act imperfectly, bad things tend to happen.
@Esquire99: I agree with you that CCs are not necessities and there isn't really a social policy at all behind government-run CCs. Seems like anyone suggesting this wants to exploit the economic downturn for an economic power grab.
I don't use credit cards.
But if I did, I think I would rather use this than one where I get hit with stupid-fees. I'd need all the details on the gov't card to be sure one way or the other, though.