Canadian Tire, as the Planet Money hosts noted, is a Canadian retailer like Wal-Mart. It doesn't just sell tires, as the name implies. Canadian Tire sells everything from tires to DVD players. It's kind of Home Depot meets Wal-Mart. Of course, the Planet Money hosts, not being Canadian, got the Wal-Mart analogy slightly wrong in the same way calling The Vatican a "wedding chapel" would be an analogy that fails to fully capture what it represents. Canadian Tire is not just a retailer. In Canada, it's pretty much the state religion.
[caption id="attachment_1025" align="aligncenter" width="424" caption="Will this skull terminate your good rapport with MasterCard?"]
[/caption]Anyway, I digress. The show gave several examples of links between purchasing habits and credit risk. People who buy a brand of premium bird seed at Canadian Tire were found to be very good credit risks. They rarely miss a payment. On the other hand, people who buy chrome car accessories, notably of the skull variety, tend to be very poor credit risks. Statistically they have higher default rates and missed payment rates. One bar in Montreal was also centered out as a hive of scum and payment defaulting villainy.
The explanation given for why people who buy premium bird seed reliably pay off their debts was explained that anyone who feeds random animals probably has a strong sense of their duty to others. "Others' also includes the lonely credit card company.
Planet Money also investigated the dead beat bar (called "Sharx") to determine why it was such a locus for poor credit risks. They expected a very run down dive, full of bikers, blood on the floor, etc. If you ever tried to drink underage, you're fully acquainted with the kind of place. Planet Money was, however, surprised to find a reasonably upscale establishment. You can check it out yourself. No blood. Planet Money concluded it was probably just a prime hang out for young upwardly mobile urban hipsters whose pay packets have not yet caught up with their lifestyle aspirations. You know, the kind that has an iTouch, the latest Blackberry, an Austin Mini or a Smart car, takes a yearly trip to Mexico, snowboards, but finances it via credit cards and the magic of making minimum payments, balance transfers, and card companies that simply increase your limit when you reach your limit.
No explanation was given why people who buy chrome skulls to boss up their ride tend to miss more payments but we were left to reach our own conclusions. They're probably not good people, right?
Okay, a pretty entertaining piece but part of it had all the hallmarks of what Russ Robert of EconTalk likes to call "ex-post storytelling". For example, people who buy bird seed are more socially conscious and this also includes paying up their debts. Sounds good. However, one might also consider such people are home owners, have nice backyards in upper middle classed suburban neighborhoods, and can generally at least make a $75 minimum payment on a credit card. Basically, my father. I'm not aware of many apartment or condo dwellers who are keen to attract more birds to their balconies, even if they have money coming out of their whazoo. A postal code might well be as good a predictor as bird seed. The report made no mention of whether or not products you purchase offer better predictive power than traditional scoring methods. Like, if you live in a poorer neighborhood, rent a small bungalow, but buy premium bird seed, are you a better credit risk than your neighbor?
Why Sharx bar popped out of the data reminded me of those puff pieces you read in the paper about an insurance company that matches astrology sun signs with insurance claims and reports that, say, Capricans… errr Capricorns are the worst drivers. The problem with these simple correlations is simple variation means some sun sign will come up the worst and some sign will come up the best. The way to run such a study is randomly divide the data pool into two. Find your correlation on the first half and then see if it is a good predictor of claims when run on the second half. Nothing in the Planet Money report indicated the methodology used by Canadian Tire.
-- Karl Mamer
Seems like someone should tell the credit card companies that there is a difference between correlation and causation.
ReplyDeletedurnett: the credit card companies don't care about causation-- correlation is good enough for them (there's probably some other factor that explains the "goes to Sharx, becomes a deadbeat" but the credit card companies don't care...)
ReplyDeleteWhat bothered me about that story was there was no indication of magnitude-- how much MORE likely is the average Sharx customer to default than the average Premium Birdseed customer? Are then 2%-per-year more likely to default (or go 90 days late or whatever measure they use), or 200%-per-year more likely to default?
Oh, credit card fun! A lot of the very lax lending that fueled the housing bubble was predicated on solely the FICO score. For a long time, FICO scores (your credit score) was an excellent predictor of credit worthiness. As the bubble wore on, lenders started using only the FICO score and not even asking for assets or income. If someone was a great credit risk because they always made their car payment on time, doesn't mean they can handle a $250,000 mortgage plus insurance, taxes, maintenance, HOA, etc. Simply relying on FICO scores out of context wasn't a good idea.
ReplyDeleteGlad you brought this up Karl, since the Senate just passed a credit card reform bill. I'll be posting about that soon too.
Credit cards, I'm always of the "let the buyer beware" mindset. Unsecured credit should be cheap? In what universe? In the USA can you still declare personal bankruptcy and the credit card companies are the last in line? I thought during the Bush years they got bumped up in line. If that's the case then maybe there is less of a justification for rates.
ReplyDeleteAnyway, splitting your Mastercard tab for Christmas over a couple months and seeing the rates you get dinged just once was enough for me to be a max payer 99% of the time.
The reality is lots of consumers aren't max paying. And they are well aware of the rates. And they should be aware of how long it will take to pay down their debt based on whatever payments they're making. What else can we do for them? If we lower rates, I know I now have an extra $50 a month that won't go towards servicing my debt so I'll just tack that onto my credit card debt and get back to where I was. No?
The reality is people are using their credit cards to finance big ticket items. That I guess sounds bad. And if people need a 19% annual interest line of credit to survive from month to month, then I think there is a deeper problem. Papering over this one symptom won't cure the problem.
Russ Roberts on EconTalk noted that people have always been financing big ticket items but they were getting the financing from the merchant himself. Remember people ran tabs at the grocer, the garage, the appliance store, the bar, etc. The problem with letting the merchant be the lender is if I'm the only merchant in town who will finance you for a washer/dryer, I might bump up the price of the washer/dryer. Sure you can get it cheaper but is the guy down the street going to lend you money? The interest rates people were paying in the 1950s from the merchant aren't much different than what credit card companies are charging today. (Or so Russ tells me.)
Credit cards have uncoupled the selling of goods from the financing of goods, which means merchants can no longer pad prices for those buying on credit.
Credit cards also compete with other credit card companies and compete in terms of services: head of the line, free traveler's checks, air miles, rental car insurance, etc. The consumers have won there, I believe. My bank's visa charges me no annual fee and I get the rental car insurance etc. As long as I use it like a fee less debit card, I win.
Unfortunately Canadian Tire and Wal-Mart do not sell premium bird seed. That can only be purchased at a wild bird specialty store.
ReplyDeleteThey simply call their seed premium and add a lot of fillers and make the bags pretty.