The Essential Immorality of the Credit Card Business

THE ESSENTIAL IMMORALITY OF THE CREDIT CARD BUSINESS

Christopher Ebbe, Ph.D.     3-12

ABSTRACT:  The immoral nature and socially destructive consequences of financial aspects of current credit cards is explained.  These moral issues are explored in terms of possibilities of a more caring, cooperative society through an ethic of voluntarily not taking advantage of others.

KEY WORDS:  credit, free, no cost, cooperation, competition, caring, concern, morality

The current structure of credit card arrangements allows the card holder to borrow funds from the credit card company for payment to creditors (businesses).  The borrowed money is transferred promptly by the card company to the business, and that borrowing is repaid later by the card holder.  A few credit card companies charge a monthly fee or an annual fee for use of the card, in addition to interest charged on unpaid balances of borrowed money. 

Most card companies do not charge interest on the loans for the first month or partial month of the borrowing, so if the card holder pays the card company for the borrowed funds at the first opportunity (at the end of the current monthly cycle), he pays no interest.  If he does not pay at the first opportunity, then interest is charged for the borrowed amounts.  At the same time, the business that accepts credit card payment pays the credit card company a fee (usually two to three percent of the purchase price, though this has been lowered by federal law recently).  The card company therefore makes money in two ways—from the businesses that accept credit card transactions and also from the card holder if he does not pay back the borrowed money right away.

There are several reasons why this arrangement is essentially immoral and socially destructive.  For purposes of this essay, a behavior is deemed immoral if a person using the behavior aims to gain something from another person while also, by the same behavior, harming that other person.  A behavior is deemed socially destructive if it leads to greater distrust, less social harmony, and less desire to wholeheartedly cooperate with others in the larger group.

Economically Helpful and Moral Aspects

(1) Providing a simple alternative to using cash for all purchases can be useful for many people (although, as you will see below, it should be paid for and not a free service).  It can also be argued that not charging interest to the borrower if the loan is repaid quickly is an incentive that encourages people to repay borrowed money quickly, which is generally to their advantage.

Immoral and Socially Destructive Aspects of Credit Cards

(1) Credit card companies know full well that many people in our society will over-purchase (buy more than they can reasonably expect to pay for) if given an opportunity.  This is due to our desire to have what we want now rather than waiting for it or saving for it.  Credit cards provide that opportunity, both because credit limits are routinely higher than the re-payment power of credit card holders and because credit card holders can obtain multiple cards in order to buy even more.  Over-purchasing complicates the lives of those who do it and can lead to financial ruin in a fair number of cases.  Thus, credit card companies knowingly attempt to profit from a weakness of credit card holders that will make the lives of those credit card holders more difficult, and this is immoral.  This outcome results also in defaults on debt and is therefore socially destructive.

(2) A significant amount of income for the credit card companies comes from relatively high interest charged to card holders on the borrowed money.  While a number of card holders pay their credit card bills every month and therefore do not pay interest, a sizeable number of card holders carry a balance and pay considerable interest every month (often paying only interest or so little that the total bill keeps getting larger).  This group of card holders is in perpetual debt, since they use credit cards to purchase items that they want to have now (instead of saving for them) but that they can’t afford, in the sense that they don’t have current income sufficient to pay off the borrowed money quickly and that hence they end up paying whatever they can month after month, in effect paying exorbitant amounts for their purchases when the interest on those purchases is added to the purchase price.

Credit card companies know full well that this group of card holders exists (people that will borrow beyond their means and will therefore rarely ever pay off their balances) and consider them, therefore, to be a long-term, captive source of income.  Credit card companies have constructed their business model to gain from the inability of this group of card holders to manage their money (and their buying behavior) better.  Since they aim to gain from offering credit (borrowing opportunities) to these arguably monetarily incompetent people, and since they cause harm to these people by enticing them into paying exorbitant amounts of money for their purchases (purchase price plus months of interest), they are seeking to gain from taking advantage of an incompetence (or disability) of these people, and the business model is therefore immoral.  (Of course, the business model is perfectly legal, and it would not be immoral if we did not define as immoral efforts to gain from someone while at the same time harming him.)

Credit card companies (and many other businesses that benefit from the inabilities of a sizeable group of consumers to manage their money better) would argue that no one is forcing these people to use credit cards and that everyone is responsible for his or her decisions and behavior.  The underlying issue, though, is the immorality of designing a business on purpose to take advantage of some consumers. 

Another example of this sort of “taking advantage” of consumers is price-fixing by businesses that have a monopoly, such as real estate agents that charge a percentage of the house sale price rather than a fee relating to the work that they actually do.  Real estate agents would defend themselves by saying that consumers could look for sale-by-owner houses and avoid the agent fee, but most consumers do not have the confidence in their understanding of the legal issues involved to take that route, so they go to real estate agents, who charge unfairly.  Real estate agents would also say that agents are not required to charge a percentage of sale price, but, of course, if they do not, they are restricted from using the multiple listing service, which is the best resource for buying and selling houses.  The incentives are arranged so that almost all agents go along, happily, with the prevailing arrangement and therefore charge consumers more money than they actually earn (if we assume that prices in general should relate to the actual cost or work done).  A similar argument can be made about the transaction fee the credit card companies charge to businesses, because it is a percentage of the borrowed money and not a standard transaction fee.  There is no rationale for charging a percentage of the borrowed money as a transaction fee, except to make as much money as possible.

Businesses would argue strenuously that in our “free country” people must take care of themselves, including avoiding getting themselves into financial trouble, but I am suggesting that we have more moral responsibility for our fellow men than to allow each other to figure out ways to take advantage of others based on their ignorance or inabilities.

(3) The credit card business model requires that large numbers of people use credit cards, which will cause large numbers of businesses to feel that to compete with other businesses who do accept credit cards, they also must accept credit cards from consumers (and therefore lose money by paying the transaction fee required).  The group of consumers who cannot manage their buying behavior well may not be large enough to to induce large numbers of businesses to accept credit cards, so credit card companies offer the use of the cards free to those who pay their balances monthly (and hence pay no interest on their borrowing), so that the number of credit card users will be large enough to leverage most businesses into accepting credit cards for payment.  (Credit card companies might argue that businesses that accept credit cards get enough additional business from doing so that it offsets the transaction charges that the businesses pay, but I have seen no data to support this.)

Offering the use of cards for free is fundamentally immoral, since it distorts the proper relationship between buyer (credit card users) and seller (credit card company), which would be for all credit card users to pay a per transaction fee, so that they know clearly what they are getting and at what price.  The reader might wonder in amazement how offering something free could be bad.  It is “bad” because it is not motivated by a desire to give as many people as possible a free service, but rather it is motivated by the need to “use” those free users as bait for businesses that will then feel unable to resist accepting credit cards as payment and therefore will pay credit card companies the transaction fees that form an important part of their income.  This enables the credit card companies to “feed off of” that smaller group of people who cannot manage their buying behavior well, are therefore constantly in debt, and therefore pay endless amounts of interest to the credit card companies.  Those who manage their money well (pay loans off quickly) benefit, and card companies benefit, all at the expense of those who cannot manage their buying in such a way that they do not pay excessive interest.

This behavior (offering things for free) is similar to the come-ons used by other businesses when advertising a small number of items for reduced prices in order to attract larger numbers of people (most of whom will arrive too late to get the reduced price but may still buy something else from the store).  The store is not motivated to provide any product as cheap as possible, but rather it “uses” the desire for something “free” to motivate people to come to the store, even if they do not get anything free.

As noted above, the honest (that is, clear and straightforward) behavior would be for everyone to pay directly the (same) cost of whatever product or service they receive (rather than getting something free or getting a discounted price).  Otherwise, the transaction is dishonest, and this dishonesty is inevitably harmful to individuals and is therefore immoral.  Some business people would argue strenuously that they are free to charge any price they want to any consumer, and it is true that this behavior is currently legal, but charging different prices is always for purposes of manipulation of others on the part of the seller.

(4) Even more fundamentally, the credit card business operates (as do most businesses) on the principle of making as much money as possible (in as many ways as possible) rather than on the principle of charging what a product or service costs, plus a reasonable profit.  The credit card transaction charge to businesses might be sufficient to pay for the costs of the credit given plus a reasonable profit, but card companies charge interest to borrowers as well.  The interest charges to borrowers might be sufficient by themselves to pay for the borrowing and provide a reasonable profit, but the card company charges merchants also.  The payment(s) to the card company have no necessary relationship to the cost to the card company of providing the credit.  They are simply as high as they can be and still induce enough people to use the credit cards to make the enterprise profitable.  This is part of “the American way,” of course, which is to get as much money from others as they are willing to give, which means that any profit level is justified.  Since providers of products or services never tell consumers what the product actually costs to make or provide, consumers never know what the profit level is and therefore never know if it is reasonable or not. 

We say that we are “protected” from overcharging by competition between various makers and providers, but as we permit more and more product makers and service providers to get larger and larger (justified by economies of scale and promises of better, unified operations), we knowingly reduce the amount of competition that “protects” us.  Our desire to get as much money as possible, morally or immorally, also prompts businesses to conspire in uniformly charging enough to make unreasonable profits, even if there is no communication among them and they all just increase their prices to keep up with the others.

Advocates of free markets argue that an appropriate price will be determined by the interactions of competing providers and consumers, essentially arguing that whatever price consumers are willing to pay is a “fair” price and that there are no “unreasonable profits.”  According to this position, a bread supplier charging $100 for a loaf of bread in a disaster area is justified in doing so if people will pay this price, though this ignores the fact that only a few people can pay this price and most may go hungry.

Basic Societal Issues

The basic social problem with free markets is that they accept the assumption that all members of society are competing with all other members of society to gain from a pool of limited resources.  This drive to gain and acquire motivates people to strive to do more or better than others, as well as calling forth the willingness of most people to deceive, defraud, and overcharge others, and free market philosophies accept these selfish and harmful behaviors as the price of “freedom” and of getting people to produce more.  The positive side of this drive is that people expend considerable energies in finding out what others will pay for and then supplying that product or service, perhaps (if there is some true competition), in increasingly efficient and inexpensive ways.

An alternative market philosophy would assume that people can function basically as cooperators rather than competitors.  This cooperation might suggest that people seek only “reasonable” profit margins, rather than seeking to get rich quickly by making profits as high as possible, since to seek only “reasonable” profits would make that product or service available to others at a lower price.  This view has been a staple of socialist and communist societies, and unfortunately history suggests that government-controlled economies have enough corruption in their design and oversight and lead to enough lethargy among workers that they have not succeeded over time.  (Actually they have been capable of sustaining those societies, but the desire of members of those societies for more freedoms and more products and services has eventually eroded the will to impose cooperation on the populace.)  It is clear that self-interest on the part of all participants in a modern economy is necessary, but that self-interest need not extend to taking advantage of others, by lying, withholding information, or psychological manipulation.

An argument can be made that advertising that is designed to induce consumers to buy is immoral, since the aim of the advertising is to induce consumers to buy more than they otherwise would (more than they would if they simply regarded their own needs in the absence of advertising). It becomes immoral if we assume that buying more than one otherwise would buy can be harmful (from the increased but induced buying).  (Seeking the personal information needed to do targeted advertising, as is being done and debated on the internet, could also be seen as immoral, since the purpose of such personal information is to assist businesses in selling more to consumers than consumers would buy in the absence of such advertising.)  A large economy needs methods of informing consumers about consumption opportunities, but our current form of advertising aims to psychologically manipulate consumers to buy, which at times is not in the best interest of those consumers.

To generalize from seeking only “reasonable” profits, not using psychologically manipulative advertising, and not misrepresenting products, the basic ethic suggested here is simply not taking advantage of others, which means not trying to deceive them, not trying to appeal to emotions unrelated to the product or service at issue (usually pride, status, and superiority feelings), and only charging costs plus a “reasonable” profit.

Americans like having the opportunity to make large amounts of money, by any legal means possible, including deceiving and lying to consumers (viz., much of what we see in advertising; the privacy policies and contracts that no one can understand; etc.).  Perhaps we do not want to require anyone else to tell the truth or to disclose the complete truth so that we ourselves can also remain free to deceive and lie to our fellow citizens (since we fear deep down that if we tell the truth and are transparent about our behaviors, we will lose our “competitive advantage,” others will criticize or turn away from us, and others will use our honesty and transparency to take advantage of us).

You may be concerned about shifting from our current moral stance, which is that each person is completely responsible for her own behavior, so that the rest of us are free, morally, to try by everything but outright lies to induce others to buy from us or to use our services.  I am not suggesting that people should be less responsible for themselves, but rather that in addition to that, we would have a happier and more happily interrelated society than we do now if we also were responsible ourselves for not trying to get others to give us money (in return for products or services) when to do so would harm them (directly, or indirectly by putting them in more difficult circumstances because of our transaction, such as excessive debt).  It would be a change from “sell if at all possible” to “sell if it is appropriate.”  You may scream, “But only that other person can know if more of my product or service will be in his best interest,” but I would suggest that in some instances, you, the provider or seller, can in fact see that more of your product or service is not the best choice for the consumer.  This need not be an excessive burden for you, the seller.  An example might be declining to sell an expensive car to a mentally deficient (but still legally competent) man who has just barely enough income to live on but has just received a small inheritance that is just enough to pay for the car (but not the insurance or upkeep).  Another example might be requiring a couple who have declared bankruptcy twice to get financial counseling before you sell them a house.  A further example might be deciding not to sell cigarettes in your store because you believe the health consequences of smoking to be considerable.  The moral requirement would be to take some action (additional information or advice for the buyer, discussion to ensure that the buyer “knows” what she is getting into, etc.), out of concern for the buyer.  In some of these examples, the seller might also decline due to unacceptable risk for the seller, but the moral issue is having concern for the buyer as well.  (It is part of the ethical code of professional psychologists to terminate treatment if the client is not benefiting, and the ethical codes of other professions, including salespersons, could be similarly modified.)

This concern follows from the growing realization in our rich society that people at least sometimes and perhaps even often do not know what is in their best interest and do not act in their best interest, as has been demonstrated by our problems with obesity, substance use, and over-spending in general.  It is becoming clear that our innate or evolutionarily-developed capacities are not really up to the task of coping with having more than we need, which has become possible in developed economies.  If we were not so rich, and if we did not have so much preferentially-disposable income (but had to use almost all of it on food, basic housing, and other essentials), this would not be as much of a concern.

This little bit of additional concern and caring for others would make our society a more comfortable and less anxious social context in which to live, because it would reduce the constant vigilance that is currently needed to protect ourselves from the many around us who we know are always looking for ways to take advantage of us, and it would allow us to be more relaxed and friendly with each other, because of the lessened resentment we would feel about those efforts to take advantage of us.  After considering the arguments in this essay, one could still think that since human beings are biologically incapable of having a caring attitude toward everyone, we should therefore simply continue with our competitive society and enjoy its material fruits, but it does not seem proven yet that people cannot expand their circles of caring significantly.  It might even be that the fears of not having enough, when that was an ever-present reality, as it was for people prior to the modern age, were too great to permit a more caring society, but it may also be that having enough, as many of us do now, does allow us to relax those fears and give our natural capacities to care the chance to apply to more of those in society (to enlarge our circle of those we care about enough to avoid taking advantage of them).  It could be that eliminating “sell if at all possible” and eliminating manipulative advertising and free credit card use might reduce our Gross National Product somewhat, but these things might also lead us to be happier.

There are many, many people in this country who feel that they have some moral responsibility not to take advantage of others by any means--with excessive charges or profits, with lies or fraud, or with psychologically manipulative advertising.  These people generally do not “make the news” and remain anonymous to our public perceptions of society.  Also, the desires of the recent “Occupy” movements seem to be consistent with the focus in this essay—to have a society that is more cooperative and less predatory.  The keys to having a more cooperative society are (1) to decide that we want the kind of society that is produced by higher standards of honesty and transparency with others, (2) that we want the kind of society that involves more citizens having concern for others, (3) to accept the possible slightly lower standard of living that might occur if everyone did operate in a caring and cooperative way rather than competitively, (4) to accept the restrictions on ourselves of not using personal contact, false information, and advertising to “take advantage” of others, and (5) to begin to negatively reinforce (protest to, boycott, publicly criticize, personally complain to, etc.) sellers that try to take advantage of others and to gently point out the options for caring more for others as they present themselves.

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