Credit Cards and Our Nation of Children

Congress is about to pass “sweeping credit card legislation.”  I don’t think it’s all that sweeping, and although overall I don’t particularly object to it, there are aspects of it that bother me.

C Cards (Andres Rueda) Reassuringly for us curmudgeons, the bill is hardly revolutionary, largely a collection of modestly worthwhile reforms and regulations. There are rules about how interest rates can be raised and late fees charged. Most people will not notice any effects, and even those that do will probably forget about it in a year or two.  

However, there is one aspect of the would-be law that is significant both in its impact on a small slice of the public and as a sign of the times.  The just-passed Senate version of the bill outlaws credit cards issued to those under 21.  The House version set the minimum age at 18.  That’s a big difference in my book.

American laws are ambiguous about when adulthood starts.  For many purposes, 18 is the magic number.  At that at age you can vote, get married, join the armed forces, and, with the looming exception of credit cards, enter into binding contracts including a car loan or a mortgage.  There are still a few age limits that are lower. In most places you can work full time and drive a car before 18, but those minimums have been creeping up.  The Insurance Institute for Highway Safety has endorsed raising the driving age to 18.

And then there is the small but growing list of things you have to be 21 to do.  Buying alcohol is an obvious example.  In most places you need to be 21 to buy a handgun, although other firearms are available if you are 18. (Cigarettes, incidentally, can be purchased at 19 in 4 states and at 18 elsewhere.)  You must be 21 to enter a casino.  In some jurisdictions the (pretty notional) minimum age for buying pornography is 21, although, as I understand it, everywhere in America you can legally perform in it at 18.  (I will bet money that somewhere in our great nation is a strip club where the only under-21s allowed inside are the strippers.)

This inconsistency bothers me, but not as much as the worrying general trend of increasing the age at which we consider people to be grown-ups.  And that is just part of an even larger trend, the growing reluctance to treat anybody as a grown-up.

There was a time in which somebody would have stood up and made the argument that consumers knew that interest rates on credit cards could be changed at any time and freely decided to borrow the money anyway.  It is not as if this feature is new or unique to a few cards.  It is a basic premise of short term borrowing and lending.  Perhaps some brave soul said this in the recent debate.  I didn’t hear him.  The credit card bill passed the Senate 90 to 5.

The problem with legislation such as this, and there are many examples, is that, to paraphrase Robert Nozick, it prohibits economic acts between consenting adults.  Put another way, it attempts to stop people from making foolish choices by removing those choices as options.  It is what we parents do for our children all the time, but what governments should do for their citizens only very rarely.

I am not a radical libertarian.  I think assault weapons should be illegal and I have no objection to seat belt laws.  And with the exception of the age 21 bit, I don’t find the credit card bill to be all that objectionable.  But the general principle and trend is troubling.  Why can’t I agree to allow my credit card to change its rates or apply payments to lower interest rate balances first?  I understand what I am doing and perhaps I think in the long run I will get a lower rate this way.

Why not a law forbidding mortgage types other than 30 year fixed?  Or down payments of less than 20%?  I am sure that there are members of Congress willing to sponsor that legislation right now.  There are no doubt millions of people who acted very unwisely by taking out these sorts of mortgages and would have been better off if they had not been allowed to do so.  But what of the millions who chose these mortgages appropriately and wisely and are better off because they were available?

When it comes to personal finance and public policy, banning certain economic acts is treating the symptoms rather than the disease.  The problem is not that the various practices banned  by the new credit card  law should never have been legal. The problem is that so many people, adults all, lacked the knowledge and judgment to look out for their own best interests.

[Photo: Andres Rueda]

32 Comments

  • By ObliviousInvestor, May 20, 2009 @ 1:20 pm

    Have you ever read Nudge? It explores the idea of choice architecture–asking the question, “How can we structure decisions to lead people in a certain direction, while still preserving their right to choose?”

    I’m sure it’s not the first, only, or even best book on the topic, but I found it pretty fascinating.

  • By Frank Curmudgeon, May 20, 2009 @ 1:35 pm

    I haven’t read it. Probably should.

    I agree that making the default for 401ks that the employee does particpate and in a target fund is better than no participation and/or money goes into a money market. However, I worry that we then allow ourselves to ignore the core problem that many (most?) employees don’t understand what they should be doing with their 401k.

  • By SJ, May 20, 2009 @ 1:37 pm

    Also don’t forget… 25 is the magic age for car rentals!

    I thought the bill just made it more difficult for those under 21; i.e. needing co-signer or proof of income. I don’t see how that should be different for someone over 21, proof of income that is.

    Also, I thought age 18 was already a hard limit as they couldn’t hold you to a contract? At least my friend told me he would always apply for credit cards w/ free goodies when he was 16 b/c they would have to reject him.

    “The problem is that so many people, adults all, lacked the knowledge and judgment to look out for their own best interests.” Yayyy

    For those that choose not to learn and what not… what do you do? They’ll just complain and want more helps =)

  • By ObliviousInvestor, May 20, 2009 @ 1:48 pm

    As to 401k’s: Agreed. I think a “default enrollment, money goes into target fund” system would be an improvement, but it certainly doesn’t solve the problem entirely.

    For instance, it wouldn’t do a great deal to keep people from bailing out after a market crash.

  • By Rob Bennett, May 20, 2009 @ 1:57 pm

    “The problem is that so many people, adults all, lacked the knowledge and judgment to look out for their own best interests.”

    People are smart. I see no problem on that score.

    I think that the problem is that the ways in which information is transmitted have changed and as a society we have not yet caught on to the significance of the change and responded to it effectively. People intellectually understand credit cards. But people do not generally do not make choices based on a process of logical reasoning. People believe what is repeated many times. Companies selling credit use marketing to persuade. People are pretty much helpless before an enticing message repeated thousands of times on television.

    You’re right that the protections being adopted will not entirely do the job. But people feel a need to do something. And things have not yet reached a point where enough people see the need to take more radical action.

    I think that middle-class people need protection from the negative effects of marketing. I don’t mean legal protection. I mean educational efforts. We need a serious effort to educate people to how they are being hurt by companies with marketing machines behind them. We need a counter-marketing-machine for the middle-class worker.

    It will take some time to develop such a thing. That’s the downside.

    Rob

  • By Baker @ ManVsDebt, May 20, 2009 @ 2:05 pm

    Great minds think alike. Either that or we just stumbled up onto the same soap box ;-) !

    This could have literally been taken word for word out of my brain. I couldn’t agree more and think you’ve really nailed the core of the issue.

    It’s a slippery slope and one I’m not sure I want to go sliding down right now. I don’t mind government trying to prevent abuse within reason. I just think we are playing along the boundaries of reason with this one.

  • By Mr. ToughMoneyLove, May 20, 2009 @ 2:27 pm

    They should have thrown this bill away and passed one that bans merchant agreements which prevent discounts for cash buyers.

  • By Dave C., May 20, 2009 @ 2:46 pm

    I think that many of the problems we are now experiencing are a result of the fact that in the last ten years, more people have had access to more credit than any time in history, regardless of their financial means or knowhow.

    As opposed to Rob B., I tend to think that most people are in fact ignorant of many things, rather than assume they are smart. Credit Cards can ruin lives if not used properly, maybe not as dramatically as guns, but ruinous just the same.

  • By Jack, May 20, 2009 @ 3:01 pm

    Is the credit card industry offering any more choice than the government? Can you show me a currently offered card that lets me pay off my higher interest rate balance first? Where is the free market innovation?

    I guess your answer would be that credit cards aren’t the right product for me if I want to do something like that… Or maybe I should just play the balance transfer game?

    As long as our choices are going to be limited, I’d rather be limited in the least abusive fashion.

  • By JB, May 20, 2009 @ 3:32 pm

    It’s a fair point. I think that the argument in favor of trying to prevent people from acting foolishly is that we all pay the price when they do.

  • By SJ, May 20, 2009 @ 6:18 pm

    @JB yay! Precisely heh… if we can’t take advantage and be subsidized by those less responsible than well.. sadness…

    @Ron B: I don’t think people are smart. Or at the least are rational.
    “But people do not generally do not make choices based on a process of logical reasoning.” I think that disproves intelligence (logical reasoning is tested iirc =) )

  • By ryan, May 20, 2009 @ 9:46 pm

    After becoming a parent and observing things from that perspective I’ve started to realize there’s a fundamental problem in our society that underlies alot of other issues.

    We are far too eager to push young children into adolescense, and far too reluctant to push young adults out of it.

  • By James, May 21, 2009 @ 6:17 am

    It’s not just that is prevents consenting adults from doing business, it severely (in my opinion) puts young consumers at a disadvantage.

    Credit scores weight revolving credit heavily. Forcing people to wait until age 21 to begin building credit in their own names means that during the intervening years those people will pay more for car insurance, interest on car loans, etc. because they don’t have credit scores to qualify for lower rates and premiums.

  • By Kosmo @ The Casual Observer, May 21, 2009 @ 12:24 pm

    I personally found the “guns in nationaal parks” amendment the most surreal part of the bill. I prefer to at least be able to draw some sort of line betrween the main bill and the pork – maybe a crooked, dotted line, but a line nonetheless. I struggled to make a connection in this case.

    I guess you could buy the gun with a credit card :)

    [Note: I'm not making any judgment about the merits of the gun issue, just that it's strange to include it in this bill]

  • By Ridiculous, May 21, 2009 @ 12:44 pm

    I think the idea that we need a concrete age to determine when people are adults is absolutely preposterous.

    People don’t magically gain maturity and become ready to take on more responsibility as soon as they hit 18. That becomes painfully obvious when you’re a college senior watching all the incoming freshmen. Also, the legal gambling age in Las Vegas is 21, but here in Minnesota it’s 18 if you’re in a legal casino. I think it’s 18 most other places too.

    Anyway, back to my point… There is no reason why we need all these things to happen at 18 OR 21. I see no inconsistency here. You are a legal adult at 18. What this means is that you are able to declare independence from your parent/guardian and are able to sign binding contracts and enter all manner of legal agreements.

    Although I agree the drinking age should be lowered, I think the gambling age should be 21 universally, the drug age should be 21, the driving age should definitely be 21, and the age to purchase pornography should be 18 universally.

    But, to the original point of the article, I definitely think that people should not have credit cards until they’re 21. It’s a death trap. The average American is in credit card debt… Nevermind you how deep the debt is (and it is deep, even on average), the fact that people are so irresponsible is alarming.

    I think the real problem is there is no mandatory in-school education in junior high AND high school AND college about credit cards and debt and investment. People just treat it like it’s not a big deal.

  • By IndependentOperator, May 21, 2009 @ 12:58 pm

    @Jack,

    People are not willing to pay for a card that allows high interest debt to be paid first. So the government has decided to force that feature on all cards, which will force the price increase on all consumers. Congrats.

  • By IndependentOperator, May 21, 2009 @ 1:04 pm

    @James:

    That is a very, very good point. Assuming that the amount of credit available remains the same, what would likely happen is the banks still have to give that credit to someone, and they will just have to do it with less available information, thus taking on more risk.

  • By ryan, May 21, 2009 @ 3:15 pm

    Does the interest rate on your credit card matter to anyone reading this blog?

    In other words, are you using credit cards as anything other than a free method of payment more convenient than cash? Why?

  • By Brian, May 21, 2009 @ 4:57 pm

    Said strip clubs exist in Oregon, where the dancers under 21 have wrist bands to indicate that they can not be served alcohol.

  • By Bad Economy, May 23, 2009 @ 6:57 pm

    For the responsible, you can damn well expect low introductory rates and bonuses to go bye bye because the banks need to get their money somewhere.

  • By Carl Plant, May 23, 2009 @ 10:40 pm

    Bennett just wanted to hear himself speak:

    “I see no problem on that score.

    I think that the problem is that the ways in which information is transmitted have changed

    But people feel a need

    And things have not yet reached a point

    I think that middle-class people need

    I don’t mean

    I mean educational

    We need

    We need

    It will take some time to develop such a thing. That’s the downside.”

    Rob,

    You can manage to use more words to say far less than any three people that I ever did meet.

  • By LiiZOR, June 14, 2009 @ 12:38 pm

    Simply stated: I believe everyone has missed the real underlying problems.

    On the human level, too many Consumers have become powerless over their egos, impatients, greed, lust, and have lost self control. Many are desirous to have it all; and they want it now! They want the best, most popular or anything that makes them feel better or look better than their neighbor. Their thinking is steeped in “I am better than you” because I can spend more than you. Or, I am “better now” because I can “spend more now” with my credit cards.

    As Consumerism is still the social regulator between the wealthy and the poor. Lending and borrowing has remained the tool for the wealthy to use to control the poor. Governmental regulation does nothing to stop it or control it. The only thing Governmental control does is help the Rich remain rich and the Poor remain poor. They do this by making people dependent rather than independent… Yadda, yadda, yadda!

    As a Consumer (now rendered powerless by today’s Federal economic control) I don’t understand why we, as consumers, have let our control over the market and economy slip through our fingers.

    The poorer consumers along with the lower middle class makeup 80-90% of the economy, and yet we have no control over it. Have we grown tired of fighting against the rich working with the State and Federal Governments to keep us enslaved with their “lifestyles of the rich and famous”? Do they really think they are the Rock Stars, Movie Stars, or the Elite they pretend to be? I guess to them it really doesn’t matter as long as they can “Feel” like one by buying, buying, buying!!!

    We are saturated with the constant bombardment of look-better, feel-better, be-better, by buying this product or that product.

    STOP BUYING!!!!

    Tell the manufactures, the sellers and the credit card companies, you’re done with the hype.

    Write them! Call them! Email them! Refuse to let them and the Government control “The Market”. We need to set the price for the products “we want” and if they refuse, don’t buy their products, don’t buy their stock, boycott sellers who continue to carry the product or look down on your neighbors who continues to purchase from these greedy hype mongers. Get Real People!

    The other issue not addressed is the transition of this country’s economy changing from being a Democratic Republic one to a Federalized Socialistic economy. The ruling class with the assistance of the Federal government are continuing to erode the lives of the majority of consumers by assisting a few selected consumers. They parade themselves in newspapers and TV as the heroes saving the poor, helping the economy, and trying to enrich our lives. But, in reality they are manipulating the system to get even richer and to make us even poorer.

    I’m sorry for ranting, but until we as the working class can get raises and move up the corporate ladder faster than the national cost of living. And as consumers, can keep up with the inflated prices of the products on the market, I will continue to stop paying the prices the current market has to offer. I will tell others to stop buying as well.

    We as consumers must take back our control in regards to home prices, rental prices, automobiles, and groceries. Stop letting the Rich, the Banks and other Financial institutions, and the Federal government tell us how much to spend and what we can buy.

  • By Stephanie, June 16, 2009 @ 2:44 pm

    Here’s hoping the credit card I just applied to will still approve me…I’d rather appreciate the three year head start on building good credit. I think it would be somewhat ironic if I were deemed old enough for student loan debt – which will most likely top out for me somewhere around $40,000 – but not responsible enough for a credit card with a $1,000 limit.

  • By hootowl41, April 18, 2010 @ 2:06 am

    I just got the best credit card ever. It’s a visa on a Saudi bank. It’s a 30 day loan period. In 30 days, the money is taken from your account. No interest EVER! Now that makes sense!

  • By Aaron, May 7, 2010 @ 5:08 am

    I am a radical libertarian, and yet I do support certain credit card reforms.

    Making them eliminate deceptive practices seems reasonable. Using deception to to charge people more than they thought they would be charged seems like a breech of contract, an area where even nutcases like me think there should be some regulation.

    Of course, I am sure it was always all in the fine print. So maybe the real question (for me, at least), is whether it is possible to lie (in a legal sense) while still technically telling the truth in 5 point grey font.

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  • By swingdancer87, June 26, 2013 @ 2:25 am

    One fact that this ignores is parents helping their children learn how to cope with credit cards. Since I get a credit card offer in the mail almost every day these days, it’s hard to argue that children will not be exposed to this phenomenon once they are out of the house. My parents got me a credit card at 16. They went over how to use it, what it was for (emergencies, things I could buy with cash) and what it was not for (anything I could not currently afford). They taught me to pay it off every month and went over my bill with me when it arrived. This allowed me to build a good credit score at a young age, giving me better student loan options in college and better financial options in general now that I’m an adult. It also taught me how to use a credit card correctly. That experience would be prevented by this law.

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