21st Century Thrift & Banking

Al Jacobs

At a local restaurant not long ago I received a dramatic lesson in banking. My personal credit card was rejected as nonprocessable. A prompt phone call to the card issuer, Citibank, revealed the reason: their receipt of a report from credit agency Experian of derogatory information. My previous credit limit of $12,900 summarily became $750, and as the card’s current balance exceeded that sum, it ceased to be usable.

The credit report I obtained through my personal banker the next morning told the story. A mortgage loan payment on an apartment complex I own had been overlooked by my property management firm four months earlier. Upon discovery of the oversight, my manager tendered payment along with the following month’s installment. The loan servicer, a major banking entity, reported a “30-day late” to Experian, resulting in reduction of my FICO score from 815 to 726, and triggering the notification to Citibank effectively cancelling my card.

Despite a seven-year record with Citibank, where each month I paid my card balance in full within 48 hours of receipt of the statement, I nonetheless found myself relegated to the status of an undesirable.

In criticizing Citibank’s seemingly unwarranted action despite my exemplary payment record, I may be missing the point. Perhaps a more accurate explanation for their conduct is because of my exemplary payment record.

In an earlier age, banks viewed their best customers as the ones who scrupulously honored their debts by paying on time and incurring no blemishes. In those days the banking industry operated under the Rule of Three: pay three percent interest to depositors; charge three percent higher, or six percent on loans; and banking officials arrived at the golf course by 3 p.m. Preferred customers caused no inconvenience.

Somewhere along the line bankers discovered a potential bonanza slipping through their fingers. The real profit to be harvested is not the modest interest differential between borrowers and depositors as historically financed the industry, but rather penalties and fees to be imposed. Once that revelation sunk in, banking officials became obsessed with setting rules to maximize profit, and nothing matched the potential of imposing punitive interest rates whenever possible.

I recognize now Citibank regards me as unprofitable and expendable. Over my years as a cardholder they’ve yet to collect a dime in interest, late charges or fees of any sort. If their actions induce me to close my account in disgust, it will probably cause them to rejoice.

I’ll summarize this single banking episode with a personal observation. Any organization employing the sort of highhanded tactics I’ve just described is one from which we are all better off keeping a safe distance. I will, of course, terminate my account as soon as I obtain a new credit card through my local bank. As I suggested earlier, Citibank will be as pleased to be rid of me as I will of them.

This brings us to the realization both the nation’s banking practices and the public’s attitude toward thrift is far different than in an earlier era. It’s a rare event when someone systematically saves up to purchase for cash such things as furniture, a computer, or an automobile. The accepted procedure is to arrange a time account, often on a credit card, where interest at some rate must be paid whenever the cardholder chooses to pay less than the full card balance each month. It’s this rate, set unilaterally by the card issuer that can easily defy logic. Clearly, their aim is the maximum the traffic will bear.

To attract business, banks regularly solicit credit card customers by offering low interest rates on transfer balances from the accounts of competing lenders. Here’s the pitch Citibank used: “Dear Mr. Jacobs, Because of your good standing, you are pre-approved to apply for our Citi Diamond Preferred Card with low APR on balance transfers. There’s no annual fee and no balance transfer fee with this offer.” The accompanying letter prominently boasts “0 percent APR” for 12 months, followed by a rate of 8.24 percent thereafter.

Less noticeable on the reverse side, in far finer print, you will find the qualifiers. “We can change the rates, fees and terms of your account at any time for any reasons … such as your failure to make payments to another creditor when due. All your APRs may automatically increase up to the Default APR if you default under any … ” and on and on it goes.

Not so incidentally, the Default APR listed is 29.99 percent. It takes no imagination to understand how the game is rigged. Prospective customers are lured with giveaway interest rates, only to be nailed to the cross as soon as something – almost anything – can be rationalized as “a reason” to automatically increase the rate. This variation on a traditional bait and switch tactic must be devastating on those poor unfortunates unable to pay their full card balance each month.

What I fail to understand is why the general public ever allowed itself to accept the concept an increasingly higher level of personal debt is acceptable. How can someone with limited income permit a portion of it to evaporate as interest? Nonetheless, an increasingly high level of debt is now accepted as customary by a substantial portion of the American public.

In late 2017, median debt per American household stood at $2,300, with the average debt at $5,700. Combined data from the U.S. Census Bureau and the Federal Reserve reveals the following:

Average U.S. Debt for balance-carrying households: $16,048

Total Outstanding U.S. Consumer Debt: $3.9 trillion

Total U.S. Revolving Debt: $1,022 billion

38.1 percent of all U.S. households carry some sort of credit card debt

Households with the lowest net worth hold an average of $10,308 credit card debt

It appears consumers are now using their cards to finance more purchases than ever before. Perhaps the public’s increased tendency to go into hock can be attributed to the power of advertising, though I confess I don’t really understand the public mindset.

A final few thoughts: America is no longer as it was. In an earlier time, under the influence of the traditional Christian ethic, virtue took on a divine quality. These principles included thrift, honored for its own sake.

I recall a popular tale about the wife of a man of extremely modest means whose food shopping consisted of selecting the lowest priced items from numerous markets. This meant bread purchased from one store to save 3¢, tomatoes from another to gain 6¢, chicken at still another for an 8¢ benefit, and so forth. Naturally she walked from store to store – or perhaps the word trudge helped add a touch of pathos. In any event, the story served its purpose. It illustrated frugality as approaching godliness, with no limit to the exaltation experienced in such behavior.

But things change. A recent report includes the revelation that over half a group surveyed said they refuse to bend over to pick up a penny on the ground. Speaking for myself, one will never be passed unpicked. Perhaps this reflects my recollections as a teen-aged pinsetter in a bowling alley earning a dime a line. A penny represented retrieval and resetting of ten wooden pins in addition to returning two 16-pound balls. To this day one cent still represents a reward for services rendered and it’s doubtful my experiences are unique. It’s hard to say whether this attitude is generational or individual. Nonetheless, what’s obvious is the concept of thrift as a virtue is outmoded, for frugality is no longer revered and will probably never return. This does not portend well for the millions of Americans who no longer exercise personal control over their financial futures. For these hapless souls I can only offer my condolences.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. You may view them on http://www.roadwaytoprosperity.com



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