July 3rd, 2008

_Paying with Plastic_, by David S. Evans, Richard Schmalensee

Subtitled: The Digital Revolution in Buying and Borrowing

I bought a used first edition; it was updated in 2005, but I am reading the 1999 MIT Press Pub.

First off, Evans and Schmalensee are _not_ historians and it shows. Rather than get into the details, I'll assume you understand well enough to not flagellate this particular deceased equine.

Second, it was published in 1999 and therefore researched and written some time before that. This is good, in that you can calibrate their ability to predict the next decade (Win: there will be fewer banks as they consolidate; Lose: Smart Cards will become prevalent). They consistently disclaimer predictions, so they deserve no special opprobrium for any errors.

I was hoping this would read like _Financing the American Dream_ Part II: After World War 2. But alas, it does not (see First off, above). While they seem to have some awareness of consumer credit before charge/credit/store cards (they even have a graph of installment plans against the other three), they repeatedly (like, in at least three separate places) commit the myth that Calder describes, in which people today think that one or two generations back everyone paid for everything out of current income. Their analysis of how credit cards reduce the need for a cash/checking/savings cushion is really good and really flawed. Here's the issue:

They set up a hypothetical head-of-family in the 1950s. Gotta have a bunch of money in checking, to write checks for everything against through the month even if you only get paid biweekly or monthly. Back then, you couldn't collect interest on checking accounts (apparently the regulations didn't permit it; hmmmm), so You Lose. Now, you can keep all your money in savings, or a money market account or whatever, where it makes you money, even during the "float" and write one check at the end of the cycle. So this compares that mythical (yes, those families existed! I KNOW! I grew up in one, timewarped forward a couple decades; but there were a lot of very different families, too) family to a "transactor" today. They recognize that some people are "revolvers". What they apparently do not recognize, or don't feel like it's worth discussing, are the old buy-everything-on-time crowd (a lot of young married from the past, as near as I can tell) to compare to the "revolvers" to discuss the tradeoffs there. And the discussion would be worthwhile (maybe I haven't got to it, if it's in the last third of the book), because under the old installment scheme, the seller/lender owned the item until the end of contract and could repo it, whereas under revolving accounts, not so much. The effect is to require credit card schemes to have a lot more fees/interest/etc. to account for those defaults, because they can't/don't repo the item, which the old installment plans used to do. The flip of that is that stores no longer have to go repo and resell stuff, which saves them a bundle that they are now willing to fork over as a merchant discount. Nothing wrong with the economics/math/thesis that credit cards are at least a wash if not a benefit for consumers and merchants, subject to individual circumstances; just a missing piece in the puzzle. Because they framed the puzzle incorrectly.

It would also have been nice to see a discussion of small loan lending/relatives/pawnshops vs. credit cards. They do a bank-loan vs. credit cards analysis, but if you're going to argue that poor people benefit from access to credit -- even expensive credit they tend to overextend on -- you should map it out against the alternatives. I think they're right -- I think it is an improvement, albeit not what it should be, but the argument is missing.

Other nice aspects: comparisons to how credit/charge/debit cards work around the world. Better than most summaries of European cards, these guys go into the details of the credit lines attached to many checking accounts in western Europe, and how that functions to supply the financing offered by credit cards in the US, and what the tradeoffs are for the various participants in the system.

If you decide to read this, get the second edition, and let me know if they fixed any of the problems. I'd also like to know if they expanded coverage of home-equity lending (barely mentioned in here, and primarily as a cheaper way to finance consumer purchases and we all can see now where that landed us). I bought it used on Amazon (got a amazingly pristine ex-lib edition for cheap) and will be swapping it along via TitleTrader when I'm done with it.

miracles _do_ occur: BLM lifted its freeze

I recently read (somewhere) about the Bureau of Land Management (you know, those people who rent public lands to ranchers so the land can be completely destroyed by overgrazing? I'd say something about ATVs, but why?). In a fit of environmental consciousness (wonder where that came from?) they put a 2 year moratorium on okaying new permits for solar installations on public land (ah, _that's_ where that came from. Hoocoodanode?). I mean, they just _now_ realized they should have been doing the similar for, say, oil and mineral rights developments, the aforementioned ATVs, the grazing ... no? They _still_ don't recognize those problems? Just with the solar panels.

Gotta love this administration.

In any event, apparently the publicity was a bit, um, negative for BLM because according to this:


the freeze is over after less than a month. But don't worry! I'm sure they'll still drag their heels as along as bureaucratically possible on actually okaying any particular application.

FWIW, I'm not actually opposed to doing EISes on the idea in general and definitely on a per project basis. I'm just horrified that while this administration is pushing on ANWR and offshore drilling and more nuclear power plans (and we _know_ how bad all those are), they're all oooh-we-must-be-cautious with solar. Double standard, much?

the every few years credit report binge

Every once in a while, I go collect a free credit report and start canceling unused accounts. Sometimes I skip the credit report stage when I decide the wallet has gotten a bit too thick. I hadn't done this in a while (cause I have a toddler), and once again, the store cards accepted because they came with some massive percentage off that I accepted in a weak moment, plus a card I quit using a couple years ago when they _neglected to mail me a statement_. That alone, fine. I called them to ask where was the statement, and by that time had late fees (well, duh) and their response to my, hey, I didn't _get_ the statement was basically, you should know when your statement is due and call sooner.

I was flabbergasted (and this was back in April of 2006) and honestly haven't stopped being appalled and disgusted any time since. I'm much more accustomed to having people be nice to me when I call to say, pretty please, it's going to be two days late I just got back from a long trip and am catching up on mail. And having the whole thing go away as if it had never happened.

In any event, I collected the credit report, canceled a couple of store cards (no bad against the store; I just don't use them and don't much like them) and wrote a snippy letter to the evil card company. Discussion with R. ensued and he speculated that this would negatively impact my credit score and maybe that's not such a good idea seeing as how we're thinking of shopping for a home loan in a few months. This pretty much made me see red, when he wouldn't leave that theory alone, because credit scores had _nothing_ to do with this particular action (seeing a link to the site where you can pick up your free credit reports, however, did, when I was reading the Boston Globe online).

I actually have a decent idea how Fair, Isaac puts together their score. I'm pretty damn sure that closing an account that has been zero balance for months, and has an outstanding credit limit of let's just call it five figures, below the middle and leave it at that - closing such an account isn't going to have much of an effect. Further, given that that is about half of my overall available/unused credit, my personal feeling is that any sensible soul looking to make a loan is going to look at my Fico (and we'll get to that in a minute), whatever it might be and say, that's good, look at the overall available credit and say, we are not comfortable with the idea you could go on that kind of spending spree. How's about you close one of those cards; shouldn't be a problem; you don't use it anyway, 'k? Because people doing home loans care about more than your Fico.

And in any event, closing an unused credit card shouldn't hammer a Fico score that hard anyway, right?

Sometime later this evening (like, a few minutes ago), I figured I'd go look at what Fair, Isaac had to say about their scoring, which mostly confirmed what I believed (closing unused credit is largely a no-op) but did throw a wrench into the mix: that particular account has been open since 1995, and therefore affects the average length of credit history. Hmmm. It's not the oldest account I have (stunningly enough, my Macy's card started out as a $100 limit Bon Marche card in _1987_). Which then made me wonder, what _is_ my Fico score, and do I care if it's affected somewhat by closing this account (which, to be fair, remains on my report and therefore a part of my score, for years and years and years anyway)?

Fair, Isaac will sell you your score; they also have a promo going on one of their subscriptions. If I can manage to cancel it in 30 days, I'm in business. So, off to check my score at Equifax, having already collected the Experian report. Once I _have_ the explanation, I retrieve my jaw from the floor because I realize the number I am looking at is not, in fact, a sample score. It's _my_ score. And the first digit is an 8.

Perhaps I shall taunt R. tomorrow morning. I think this kind of score could readily tolerate, say, closing an unused account. Even if it is one of the older ones I have.

ETA: It looks like closing the store accounts (which aren't very old) might conceivably help with average age of accounts. Closing the 13 year old *sigh* but evil and unused account would net out 1 year younger on average (so from just over 9 to just over 8). That Macy's card turns out to be _extremely_ worthy. Whodathunk? However, shutting down half the credit would increase percentage used of available credit (I don't run a balance, but I do use the cards every month). That is a bit of a dilemma.

ETA2: And for reasons best known to ... nobody anywhere at all, Equifax has my birthdate wrong, Experian has it right, and collectively, they know three of my employers -- with zero overlap. Go figure.