Business ethics, Part 2

The idea behind credit cards is simple: they’re a way for the bank to make money. And they do, billions of dollars of it every year. The trick is to find new ways to get as many customers as possible into the optimum debt profile.

The basic rules of the game are relatively easy to understand: The more you spend, the more you owe. The more you owe, the more you have to pay at the end of the month. And the more you owe after that payment, the more interest gets added on to your bill next month.

It’s a feedback loop: owe more, more interest, owe even more, even more interest, and so on.

At some point, many people let the feedback system run away for a few months, and they arrive at the optimum debt profile: they owe so much money that if they send in the biggest payment they can, it just about covers the additional interest they’re about to be charged that month.

At that point, they’re fucked. They are basically indentured servants to the bank. They can keep working, keep making payments indefinitely, and they will never eliminate the debt or reduce their monthly bill.

There’s a catch, though. Lots of people don’t fall for it, they don’t let their balance accumulate too far; so the banks are always looking for a way to tempt you to spend more.

The time-tested method is to increase your credit limit. Eventually you’ll see something you really want, see that big number on your credit card statement, and think “Wow, I could really have that, if I just give in to temptation and use the card.” That’s why people like me who pay their bills in full each month end up with a credit limit that could pay for a small yacht, while people who actually need it have trouble getting any credit limit at all.

But now, Citibank have found a better way to get people to let their credit card bills accumulate for a while. I have to say, it’s a work of marketing genius. Evil genius, yes, but impressive nonetheless.

The new Citi “Simplicity” card has one extra clause in the credit agreement: no late fees, as long as you spend more money in the month when the fees would be assessed. Oh, the cold, calculated evil.

Lose the bill on your desk, forget to make a payment by the due date, and suddenly you’re faced with a late fee of up to $39. Unless…you spend more money. And then maybe the next month you can’t quite find the monthly payment, plus a month’s interest on the full balance—so why not skip a payment spend more money instead?

And as soon as you do that, they start increasing your APR. After all, you defaulted on a monthly payment, so as per the agreement they’re entitled to increase your APR up to 30.74%, rather than the usual 0-9%.

Basically, this one simple gimmick means that you can keep spending pretty much without consequence until you hit your credit limit. And boy, are you screwed then! No more ways to avoid late fees, a sky-high interest rate, a balance you’ll probably never be able to pay off, and a terrible credit rating (because technically, you defaulted on those payments), so nobody else will take over the debt at a lower interest rate.

Citibank says it’s all about giving you “the treatment you deserve”. They also stress their “[t]ools for helping you keep a good credit history”—an option to change your billing date, e-mail alerts, and a handy automatic system to suck that minimum payment out of your bank account every month for the rest of your life. Now, isn’t that convenient?