Credit Union or Big Bank: Which is Better for Managing Your Money?

[Vanadium 50]

Because that 3% is pretty much guaranteed. The odds of ever seeing that $10,000 again are far front certain. At the peak of the financial crisis, cred card charge-off rates were over 10%.

 

[jim hardy]

But why would a card company be happy with 3%, if they can find clueless people who are dumb enough to roll over $10,000 of debt indefinitely and pay 26.9% APR on it?

There was a PBS documentary on that subject.
http://www.pbs.org/wgbh/pages/frontline/shows/credit/
and a followup
http://www.pbs.org/wgbh/pages/frontline/creditcards/

 

[AlephZero]

Because that 3% is pretty much guaranteed. The odds of ever seeing that $10,000 again are far front certain. At the peak of the financial crisis, cred card charge-off rates were over 10%.

That problem was easy to fix. Just find people dumb enough to take short term loans at 2,000% APR, not 26.9%. http://en.wikipedia.org/wiki/Payday_loans_in_the_United_Kingdom

 

[Vanadium 50]

In the interest of full disclosure, I used to be a payday lender - specifically, I held stock in a payday loan company. I left because it was not profitable enough.

Some things you might not know.

The business model of these firms is to undercut banks on late charges. (And this is why this is relevant to this thread) If you bounce a check, between bank charges, late fees and other vendor fees, you're looking at $40-60. Typical payday loans are $15 per $100. The bulk of loans are small: $100-200.

It costs about $13.50 to set up a $100 loan. This includes the building, the personnel. the financing, etc. So you can see that the pre-tax profit is about 10%. Goodwill, which is nonprofit and pays no tax and works out of their existing storefronts, charges $12. So the profits are not that large.

The customers - my customers, if you like - are not the Rockefellers. They are living paycheck to paycheck. They fall into two categories:

A. This person uses the service once or twice a year, to solve cash flow problems usually generated by unexpected events. ("unexpected" defined loosely - "the car insurance was due this month?"). The risk of nonpayment is small. Most customers are in this category.

B. This person is a chronic user, rolling over loans all the time. They often have loans from multiple places, and are borrowing from one to pay another. The risk of nonpayment is large. Few customers are in this category, but they generate a lot of loans. For some places, the majority of loans.

If the business could deal only with A's, it would be a lot more profitable and there would be fewer complaints. It costs about $150 to determine someone credit-worthiness - tell the A's from the B's. That's what it costs to run the credit reports and to pay someone to look at them and make a decision. This can't be done profitably on a $100 loan.

 

[Vanadium 50]

By the way, the customers - again, my customers, I suppose - are not dumb. They are poor, but not dumb.

The A's know they are getting a bad deal, but a deal better than anyone else can give them. The B's don't care about the deal they are getting, because they don't intend to live up to it.