Picture it: I’m sitting in Astranaar, having a text chat with Duane, when as a tangent the question of credit reports came up.
Let’s consider a hypothetical. If Joe Blow Consumer wants to purchase a cell phone, he can go to a telecom store, select a phone and a service plan, and walk out the door with no difficulty or major financial outlay. But if Mr. Consumer has a bad credit history, he can’t get a service plan; if he wants a cell phone, he has to resort to pre-paid plans, which can have substantially higher fees in the long-term than a person with sterling credit.
The story repeats itself. People with great credit get preferred rates on auto loans, mortgages, banking services, and a host of not-insubstantial things. And, truth be told, this makes sense; customers who don’t present a problem to a corporation probably do deserve some degree of consideration.
What bothers me, though, is that once you’re in a financial hole, transaction costs can loom so large that it’s much more difficult to get out. I was going to purchase a pre-paid debit card for a friend in need last week, but the transaction costs associated with it would be enormous — $20 just to acquire the card, plus a host of per-transaction (and even per-inquiry!) fees attached to the card’s use, sometimes as much as $1 each. It’d be better to just send a letter and a C-note or something. But if you’re one of the “unbanked” and need recourse to a credit or debit card, your only option is to get prepaid plastic and pay through the nose for it.
Well, people who are in dire financial straits can’t pull themselves to a better place when a greater proprotion of their funds are allocated toward transaction fees. It becomes a circle wherein the financial services sector’s rate structures serve as a virtual debtors’ prison, escape from which is extraordinarily difficult.
Duane’s observation is that this situation will likely never change, because the very people affected by these high costs don’t enjoy the political power to effect meaningful reform. So the poor or the temporarily cash-strapped will remain trapped in a cycle of predatory fees.
I suppose I agree, but still. It’s hard to build an opportunity society when the system itself is designed to divert a large chunk of the consumer base toward high-fee, low-reward financial services.
A major part of the problem, as we were talking about it, is that it only takes one bad situation to pull someone into that black hole. There’s a young woman I know who made some mistakes with her accounting, and one bounced check turned into about nine bounced checks. Her entire income for the summer was eliminated almost overnight because the bank chose to take the last check that came in because it would cause the default quickest. All the little checks that would have cleared then also bounced and caused more problems.
I believe she managed to turn the tide back in her favor by a very complicated letter I wrote for her to sign (explaining the situation and why it should never have happened the way it did). From what she says, they overturned the 8 checks and only caused her to have to deal with the 1 bounced one. But every person she spoke to before this refused to budge an inch until she came in armed with the letter I wrote her.
How many people have a persuasive writer in their pocket during these types of situations? I would argue: not many.
By the way, check out my new comic strip on my site (shameless plug). 🙂