Credit Card Default

This story here illustrates adverse selection running its natural course.

First Premier Bank seemed like a good choice for people with bad credit scores seeking a credit card and found themselves not qualifying for one with other institutions. However, with the bargain basement interest rate of 79.9%, “people ran up the card, defaulted and went directly to charge off.”

The bank discovered that even with a $300 limit, the card was attracting only people who couldn’t afford to make the monthly payment because of the ridiculously high interest rate. Even though First Premier knew it was issuing credit cards to high-risk customers, it didn’t bank on most–if not all–of the cardholders running up the cards, then defaulting on the payments.

On the other hand, the customers had much better information of their personal finances, so they quickly realized that there was no way they would be able to make any of these payments. Since most of them already had bad credit scores, they used the card on as many goods and services as they could before defaulting.

Running up the card, then defaulting on it illustrates another concept called moral hazard. Had the customers had good credit, they would not have engaged in this type of behavior because it would have hurt their credit scores. But then again, if they had good credit scores, they wouldn’t be using a credit card charging 79.9% interest.

2 thoughts on “Credit Card Default

  1. I don’t feel sorry for First Premier Bank. They are essentially gambling that most people will default, but the exploitation they will get off a few will make them profits. First Premier bank is a loan shark, and their owners should be tried in court as one. Their agenda is just plain exploitative. This is not the type of capitalism we need, where companies enter the market just to prey on the weak or uneducated. I’m sure First Premier turned these people over to ruthless collection agents as well, making this story all the more disturbing. In my line of work I try to sell to honest people who know what they are getting, I don’t make a business out of pushing a legal but unethical scam.

    1. nor do i feel sorry for first premier bank. they were attempting to take advantage of many people’s misfortune by charging an insane interest rate. i think you could get a better deal from a loan shark.

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