Exploiting Familial Ties
posted by Adam Benforado
At 5:44 AM on Sunday, I received a lengthy email from a stranger in which the author recounted his life history, apologized for various grammatical and spelling mistakes in the note, and then, in a shocking surprise, did NOT ask me to transfer money to an offshore account in order to secure my share of a fortune locked up by despotic rulers in Africa.
No, the author (EI) did not want to defraud me; he wanted to tell me about the “fraud” that he’d experienced.
EI had come across an article that I wrote in the Philadelphia Inquirer back in August about the need for a consumer financial protection agency and he thought I would be interested in his interactions with Discover.
EI is from the fading generation of Americans who grew up on the notion that a person never bought anything that they did not have the cash for. However, he recently found out that his daughter had run up $2300 on her credit card, which with interest and penalties had ballooned to $6500. EI was very worried about his daughter being “behind the curve all the rest of her life” and so he negotiated with Discover to pay cash out of his own pocket to settle the matter with the company. EI is not a rich man, but he wanted to make sure “they would never bother [his] daughter again.”
So what happened?
The very next month, Discover sent his daughter a new credit card application.
Ugh. I’d love to think that this story is extremely unusual, but it’s not. EI’s experience reveals a highly effective and proven strategy for the credit card industry: think of your customer base not as isolated “individuals” but as “units.” The ideal unit is composed of an irresponsible and cash-strapped member of the credit generation and an older relative who is skeptical of debt, cares about the younger relation (and the family reputation), and has savings to dip into. The first half of the unit charges and charges and charges; the second half pays and pays and pays.
Earlier this month, the House of Representatives passed the Wall Street Reform and Consumer Protection Act and the pressure is now on the Senate, where draft legislation is currently before the Senate Banking Committee (the bill will probably come to the Senate floor in February or March). As a result, there is going to be a push by the industry in the next few months to portray the battle as one over personal responsibility. We are going to hear a lot about “greedy” Americans living beyond their means. As the din grows louder, however, let’s not forget about all of the EIs out there — the frugal, responsible Americans who help the ones they love when they fall on hard times – and the companies that exploit them.
December 21, 2009 at 6:57 am
Posted in: Uncategorized
Print This Post
Responses (9)
Bruce Boyden - December 21, 2009 at 9:24 am
Once in a while, I miss a payment deadline, and incur a late charge. Without fail, my credit limit then increases.
Orin Kerr - December 21, 2009 at 7:30 pm
Adam, maybe I’m just missing something, but can you elaborate a bit on why it is “exploitation” to send the daughter a credit card application? I can see people being upset if the credit card company discriminated against the daughter by refusing to give her another card. She would then be denied the many benefits of credit cards, such as not having to carry around lots of cash and the elimination of any risk to the customer in case of theft.
But this seems to be the opposite: The credit card company is blameworthy for giving the daughter too many options, not too few. Given that the daughter presumably can decline the offer, why is sending the application akin to “exploitation”? Or do you have reason to believe that the daughter lacks the ability to say “no,” and thus should not be given any additional offers?
Adam Benforado - December 21, 2009 at 11:54 pm
Hey Orin, I haven’t followed up with EI, but my sense from the original email was that his upset (and feeling of being exploited) stemmed from the fact that when he settled his daughter’s bill (and the accrued interest and charges), he made it clear to the credit card company that his daughter could not handle having a credit card and that they should “never bother [her] again.”
In the post, my aim was to draw attention to the exploitation of fiscally responsible parents, grandparents, uncles, and aunts like EI who end up getting gouged when their loved ones get into trouble (often multiple times) with credit cards. EI’s story resonated with me. A couple years ago, I was shocked to learn that a member of my extended family who is mentally disabled had run up many thousands of dollars in credit card debt, interest, and charges. The elderly mother of this relative, who had lived through the Depression and always ran a frugal household was extremely distraught and under threatening phone calls from the credit card company ended up settling (just like EI) to pay off the debts herself. The mentally disabled relative continues to this day to receive credit applications.
Yes, you can say that the elderly mother shouldn’t have bailed out her son or EI shouldn’t have bailed out her daughter – that no one put a gun to either of their heads – but I think that ignores reality. Credit card companies know exactly how real people behave under the circumstances; they know they have those like the elderly mother and EI (who love and worry about their kids and are afraid that the taint of debt will ruin their future opportunities) over a barrel.
I certainly don’t disagree with your point (often glossed over by liberal advocates of reform) that freely available credit cards do bring certain benefits to certain people, but I think we’ve got to face up to the fact that these benefits often come at a significant cost.
TJ - December 22, 2009 at 3:00 am
Orin, I can’t speak for El or Adam, but it seems that when someone allows a $2300 credit card charge to balloon to $6500, that is a pretty good sign they can’t say no. And sending this person a new credit card is like giving a compulsive gambler a free plane ticket to Vegas.
Orin Kerr - December 22, 2009 at 11:18 am
Adam,
Thanks for the response. To be clear, I am not blaming El; to the contrary, I think it’s exemplary that he helped out his daughter when she needed it. But I think we all agree that after paying his daughter’s debts, El should sit down with his daughter and have a serious talk about credit cards. Assuming El’s daughter is not mentally disabled, but rather just bad with money or otherwise not very responsible with her finances, the problem is with her: She needs to realize the consequences of her decisions on both her and her father.
As for the example of the mentally disabled individual in your family, that strikes me as very different. If a business knows that a potential customer is mentally disabled, and that their mental disability means that they cannot be entrusted with their own finances, then it is indeed blameworthy if the company intentionally tries to contact with that individual knowing that the person will make poor choices but be bailed out by a family member.
TJ,
So who decides who is responsible enough to enter into a contract? The government? You? I know a lot of people who have had much more serious credit card problems than that, and they usually made their mistake once and are much more careful the next time. I would give people a second chance, rather than write them off as unable to enter into future contracts.
TJ - December 22, 2009 at 2:31 pm
Orin, a few points in response:
1. A full debate about freedom of contract is unnecessary here. I think that some people who clearly cannot say “no” (e.g. drug addicts, alcoholics, compulsive gamblers) do get disabled from making the relevant contracts. And the judgment ultimately has to be made by some third-party. That judgment simply has to be rather deferential–we don’t stop someone from buying alcohol unless they are clearly drunk.
2. The debate is unnecessary here, however, because I think we can agree on El as someone to make that decision. If you get a bailout with an implicit guarantee against further debts, the guarantor gets a say on what debts you assume. Just ask AIG and Fannie Mae.
The “exploitation” here is precisely as if AIG just issued a bunch of new debt instruments, without consulting the Treasury department. As a taxpayer who will probably be on the hook for that debt, would you be justifiably upset?
3. And one important possible difference is that you did not mention whether your acquaintances with more serious credit card problems fixed those problems through their own efforts (usually a good sign and a way to learn a hard lesson), or simply got bailed out (usually a bad sign and leads to moral hazard).
Orin Kerr - December 22, 2009 at 3:28 pm
TJ,
I suppose if EL and his daughter entered into an agreement that he would make decisions for her going forward, that’s right. Although if a parent makes a one-time payment of an adult child’s debt, I’m not sure I see that as including an implicit guarantee against future debts. Oh, and my acquaintances fixed their problems (and in some cases, are presently fixing them) by slowly paying back the debt themselves.
TJ - December 22, 2009 at 4:51 pm
Orin, I don’t think that El and daughter needs to actually “agree” to that monitoring. Suppose that El demands that his daughter agree to consult him on future financial decisions, but she refuses. El bails her out anyway. Daughter then keeps going with her spendthrift ways; getting repeated bailouts each time.
I think many of us know precisely this type of spendthrift relative. And they keep up the habit precisely because their have an implicit guarantee from the Bank of Mom and Dad. Adam’s point, I take it, is that credit card companies are exploiting precisely this implicit guarantee.
If there were a contract between El and his daughter, the exploitation would arguably be tortious interference with contract. But the beauty of this scheme is that there is no legal contract between El and Daughter, yet the guarantee still exists without it.
Adam Benforado - December 23, 2009 at 9:03 am
Thanks to you both for the very interesting comments (and TJ, yes, as you suggest, the exploitation of the implicit guarantee by the relative was the “injustice” that I was getting at).
As I read over the back-and-forth, it occurred to me that I see things as roughly similar to the situation in which there’s a man who when he gets drunk beats his wife and kids. Down the street, the owner of the neighborhood bar knows about the abusive behavior that results when the man gets drunk, but nonetheless serves him shot after shot because it is very profitable.
Now, in this scenario, the abusive man is undoubtedly blameworthy (depending on the extent of his alcoholism and other factors, we may find him more or less so), but he is not the only “cause” of the abuse. There’s the bar owner. If we are serious about stopping the violence against the wife and child, we cannot ignore his role.
Leave a Reply