By Larry Chiang
Palo Alto, Calif — Jan 29, 2009. Spring break comes around every year and with it comes news coverage of spring breakers racking up credit card debt. In this blog post, I share observations on an oligopoly, confront a monopoly and goad a government agency into fostering some competition.
Oligopoly On Campus.
According to Bank Rate Monitor, the American consumer is experiencing the largest rate difference between the Fed Funds
 Fed Funds Rate compared to Credit Card Interest Rate 1980 to 2009. By 2010, it may go from 14% to 20%. |
rate and the average interest charged on a consumer credit card. It is 0.25% vs 14.02%. This directly correlates with how few issuers are on campus hawking cards. In my observation having founded the largest credit card marketer , UCMS, that this is the least competitive market ever.
The lowest spread between cost of funds and interest rate charged the consumer was in the early ’93 – ’95 when four non-bank banks started issuing credit cards. It was Advanta, Capital One, AT&T Universal card and First USA.A non-bank credit issuer was one that would not take traditional deposits but would issue credit cards.
Fewer choices = higher rates.
Monopoly, Thy Name is FICO.
The credit score that correlates into how large life’s biggest cost, interest, is called FICO. There is no other credit score that compares.
FICO actually stands for the company Fair Isaac Corporation. Kimberly Palmer of US News and World Report did a story on raising FICO scores for college students and interviewed me. I was quoted as saying we graduate college student with a FICO over 750 putting them in the “90th percentile”. A Fair Isaac data point was used in an attempt to discredit me in Palmer’s post. It said:
13% of the population have a FICO score of 800 or more, and 40% have 750 or more.
Mr. Chiang, who gave you the figure that 750 is in the 95th percentile?
No one outside of San Rafael (FICO HQ in California) believes the average to be over 700. Monopolists behave poorly.
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The monopolist in question is claiming the FICO score average is 723. The average is not 723 even among Venture Capitalists on Sand Hill Road (article)
The real average credit score is well below 723. Its actually 575 and falling. The motivation to inflate the average 100+ points is multifaceted. 723 is repeated in Fair Isaac’s press releases and on the official website. All consistently quote an eye popping FICO score of “723“.
Fostering Some Competition
Back when banks were lobbying the OCC (office of comptroller of the currency) to merge, they claimed they would “pass the savings onto the consumer”. Banks also lobbied heavily to keep non-banks from getting an ‘industrial loan charter’. One such corporation applying for a bank charter was Walmart. Their effort to compete head-to-head is well documented here. In the end, Walmart was unsuccessful in getting a bank charter.
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Obama Factor. There’s a new administration that may focus on anti-trust. I may be less than 1/1,000th an anti-trust expert Tom Campbell, ex law professor at Stanford who also wrote a foreword for my last book, is but I don’t think breaking up a sick bank is the answer. Opening up charters to non-banks to issue credit cards will increase competition and push down credit card interest rates.
Bonus: One Big Opportunity.
College students can graduate with a FICO over 750 if they hack the Fair Isaac scoring system. In short, 24 payments made on-time in a row get a student’s FICO over 750. The definition of a payment is $20 – $50 paid on time every month. Paying $0 ontime on a zero balance is not an on time payment.
The opportunity is you as the college student is working against a stodgy 30+ year old institution that is confusing, archaic and binary.
Translation: why is it “confusing”. Its confusing because if you owe zero to Capital One, you should mail a check for $20 because then you paid your ZERO balance on time.
Translation: why is it “archaic”. A nine is credit industry lingo for a charge-off. Most charge-offs are for under $200 and knock your credit score 80+ points. Avoid 9s at all costs.
Translation: why is it “binary”. Its binary in that you either charged and paid $50 on-time that month or you did not. There are two results where one is clearly good and one is not.
Graduating with a FICO of 750 is possible for a college student after 24 on-time credit payments.
Question: If getting a FICO of 750 is so easy to do, why doesn’t everyone do this?
Answer: its easy to do. Its easier not to do it.
This post was cranked out in about an hour so email me if you see a spelling or grammatical error(s)… larry@larrychiang com
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Larry’s book releases 09-09-09 Chapter Two is all about managing treasure (and your FICO). Email him and he’ll send you a PDF. |
Larry Chiang is the founder of Duck9, which used to do peer-to-peer lending, morphed into a secret society of college students hacking their credit score and now credit educates college students on how to establish and maintain a FICO score over 750. He has testified before Congress and World Bank on credit.
He is a frequent contributor to Business Week’s blog on “What They Don’t Teach You at Business School“. For fun, Larry reads credit laws like the FCRA, crashes dorm cafeterias and hoops at Palms NBA Suite. Text or call him during office hours 11:11am or 11:11pm PST +/-15 minutes at 650-283-8008.
Larry speaks on stuff they don't teach in B-school to help you get street smart in doing business. In college, he started a business that helps college students with their FICO score. He loves entrepreneurs, Ben and Jerry's ice cream and after parties. You can reach him at:
