David R. Henderson  

"The Credit Card Companies Were There for Me"

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Every year when I go to my cottage in Canada, I invite a friend along, either at the start of the season (when he helps me open the cottage) or at the end (when he helps me close.) This year, my guest is Robert Anthony Peters, a libertarian friend whom I've met at various events over the years.

On the drive on the way to Minaki, we were discussing finances, debt, saving, etc. Robert told me that he had taken on a lot of debt to really commit to being a full-time actor (he has had small speaking roles in some major movies--The Pursuit of Happyness and Steve Jobs--and bigger roles in other less well-known movies). He has paid about half of it down. He told me that one friend suggested that he declare bankruptcy. I told him that I had suggested the same thing in the late 1990s to a friend who was in a similar situation. I had said to this other friend that the bankruptcy laws were made for just this case and that the credit card companies had taken on this risk with their eyes open--he had never lied on a credit card application about his low income, etc. My economist friend had said he knew all that and that he still didn't feel right going bankrupt. Eventually, when his mother died and left him a small amount of money, he paid down all his credit cards.

Robert, although he is not an economist, "gets" economics. So he knew the same argument I had used with my other friend. But, as with my earlier friend, Robert did not find the case for bankruptcy compelling. He summed it up nicely:

"The credit card companies were there for me when no one else was."


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COMMENTS (13 to date)
R Richard Schweitzer writes:

Then there are those who, having taken bankruptcy, after recovery and reestablishing themselves, return and make full restitution to all their creditors for any losses.

Kevin I writes:

I did not expect the tears that last line brought to my eyes.

LD Bottorff writes:

Well said. The market is portrayed as cold and heartless, but here is someone who sees the credit card companies as meeting a need. If Peters can see value in credit card companies when the whole society is telling us that they are just greedy, money-hungry, manipulative corporations, then he has something that we all claim to seek, but few actually attain; wisdom.

Phil writes:
Then there are those who, having taken bankruptcy, after recovery and reestablishing themselves, return and make full restitution to all their creditors for any losses.


If only public policy would encourage, if not demand, that. As is, bankruptcy is state-sanctioned theft.

MikeP writes:

If Peters can see value in credit card companies when the whole society is telling us that they are just greedy, money-hungry, manipulative corporations, then he has something that we all claim to seek, but few actually attain; wisdom.

He has something else too: another demonstration of the Efficient Market Hypothesis.

Perhaps credit card interest rates look high not because credit card company owners are rolling around in big piles of cash, but rather because that is the competitive rate for the service they are providing.

Indeed, the better credit card companies can distinguish those who never carry balances from those who need to carry balances, the higher those rates will be.

mattb writes:

Michael Vick did this very same thing. When he was sent to prison for dog fighting, he owed approximately $20 million. While in prison, he declared bankruptcy, but instead of chapter 7, which would have liquidated his debts, he filed chapter 11 in which he still had to repay his debts, but they were restructured. He has now completed repayments and said he felt obligated to repay his debts obligations as part of showing that he had changed his ways and to make amends for his past behavior.

James writes:

It's easy to read this as loyalty or gratitude to credit card companies but I wonder if prudence plays the larger role. Maybe Peters' full thought was not "They were there for me and I hope they will be there for me next time." Many people believe (I have no idea if this is correct) that declaring bankruptcy will make it impossible to borrow at any interest rate for years to come.

Krisis writes:

This is the argument made from people not having overwhelming debt problems, that credit gives you freedom of choice. It looks perfect in theory but credit companies are marketing and making their money of a completely different group than the one presented in this anecdote(those that will not inherit large sums of money when their mother passes). A nice little story but pretty removed from reality.

jon writes:

David Henderson writes that Robert Anthony Peters said:

The credit card companies were there for me when no one else was.
Of course, they were there for him at an interest rate that the actuaries had calculated to cover his default. So they weren't really "there for him."

jon writes:

R Richard Schweitzer writes:

Many people believe (I have no idea if this is correct) that declaring bankruptcy will make it impossible to borrow at any interest rate for years to come.
Under US law, I believe it is on your credit record for seven years.

Mike W writes:

Isn't this a little sappy for an economics blog? Or is the good professor trying to get us to think about the argument the behaviorists make regarding the rationality assumption?

JK Brown writes:

Plus, these days bankruptcy is a mark of failure and disqualification for high office. At least if you listen to all those going on about Trump's bankruptcies.

David R. Henderson writes:

@jon,
Of course, they were there for him at an interest rate that the actuaries had calculated to cover his default.
Thus my statement that "the credit card companies had taken on this risk with their eyes open.”
Correction in your statement: Insert “the risk of” before “his default."

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