H1B Visas and Tech Graduates
Posted: May 27, 2005 Filed under: VC 61 CommentsIn recent weeks I’ve picked up a couple of news items that have troubled me about the long term prospects for tech in the US. The first there was an article by a New York Times columnist that shared concerns about the sudden decline of US Universities in their production of top technology talent. Whereas in the late 90s US Universities were producing most of the valuable tech resources on the planet, today it appears that honor goes to Universities in China. If this news doesn’t worry those wishing to see the US retain leadership in tech, then news that applications for H1B visas are well below current limits should create some concern. Combined these news items suggest that not only are other countries now producing the best talent but that talent is not being drawn to work in the US. In the short term that shouldn’t be a problem. How about ten years from now?
61 Comments on “H1B Visas and Tech Graduates”
James Baker says: Hi, Fellow!I like your blog!
I just came across your blog and wanted to
drop you a note telling you how impressed I was with
the information you have posted here.
I have a job portal
site. It pretty much covers job portal related subjects.
Come and check it out if you get time 🙂
Best regards!
Joe Berenguer says: I just came across your blog and wanted to
drop you a note telling you, Friend, how impressed I was with it.
I give you my best wishes for your future endeavors.
If you have a moment, please visit my site:
job portal
It covers job portal related contents.
All the best!
James Baker says: Hi Friend! You have a great blog over here!
Please accept my compliments and wishes for your happiness and success!
If you have a moment, please take a look at my site:
loans center
It covers loans center related subjects.
Have a great day!
James Baker says: Hey Blogger, you have a great blog here! I’m definitely going to bookmark you!
I have a loans center site. It pretty much covers loans center related subjects.
Come and check it out if you get time 🙂
Best regards!
Paul Adams says: Hey Blogger, you have a great blog here! I’m definitely going to bookmark you!
I have a loans center site. It pretty much covers loans center related subjects.
Come and check it out if you get time 🙂
Best regards!
Paul Adams says: Hi Friend! You have a great blog over here!
Please accept my compliments and wishes for your happiness and success!
If you have a moment, please take a look at my site:
credit center
It covers credit center related subjects.
Have a great day!
James Baker says: Hi Friend! You have a great blog over here!
Please accept my compliments and wishes for your happiness and success!
If you have a moment, please take a look at my site:
credit center
It covers credit center related subjects.
Have a great day!
total debt management says: Hi Friend! You have a great blog over here!
Please accept my compliments and wishes for your happiness and success!
If you have a moment, please take a look at my total debt management site.
Have a great day!
Anonymous says: Debt Help
Debt Consolidation can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
Anonymous says: Debt Consolidation
Debt Consolidation can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
Debt Consolidation Refinance says: Great Blog! I love to see informative sites and active discussion. I have bookmarked this site so I can check in from time to time. If you have a chance check out this site http:\\thehomemortgageguide.com which has alot of valuable info on California mortgages Thanks again for the Blog
student debt help says: Hello Friend! I just came across your blog and wanted to
drop you a note telling you how impressed I was with
the information you have posted here.
Keep up the great work, you are providing a great resource on the Internet here!
If you have a moment, please make a visit to my student debt help site.
Good luck in your endeavors!
student debt help says: Hello Friend! I just came across your blog and wanted to
drop you a note telling you how impressed I was with
the information you have posted here.
Keep up the great work, you are providing a great resource on the Internet here!
If you have a moment, please make a visit to my student debt help site.
Good luck in your endeavors!
Anonymous says: Debt
Debt can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
http://www.debt1consolidation.com
Anonymous says: I was wondering how my neighbour could save a fortune on her credit cards. Now I too have the secret.
bad credit and credit cards says: Hi there Blogger, a real useful blog.Keep with the good work.
If you have a moment, please visit my bad credit and credit cards site.
I send you warm regards and wishes of continued success.
bad credit debt consolidation mortgage says: Hi there Blogger, a real useful blog.Keep with the good work.
If you have a moment, please visit my bad credit debt consolidation mortgage site.
I send you warm regards and wishes of continued success.
bad credit debt consolidation mortgage says: Hi there Blogger, a real useful blog.Keep with the good work.
If you have a moment, please visit my bad credit debt consolidation mortgage site.
I send you warm regards and wishes of continued success.
Anonymous says: Debt Settlement
Debt Relief can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
http://www.debt1consolidation.com
Debt Settlement
Debt Relief can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
http://www.debt1consolidation.com
sks stocks says: I am here because of search results for blogs with a related topic to mine.
Please,accept my congratulations for your excellent work!
I have a sks stocks site.
Come and check it out if you get time 🙂
Best regards!
shop life insurance rate says: A fantastic blog yours. Keep it up.
If you have a moment, please visit my shop life insurance rate site.
I send you warm regards and wish you continued success.
Anonymous says: Debt Settlement
Debt Relief can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
http://www.debt-consolidation.com
bad credit investment mortgages says: Your blog I found to be very interesting!
I just came across your blog and wanted to
drop you a note telling you how impressed I was with
the information you have posted here.
I have a bad credit investment mortgages
site.
Come and check it out if you get time 🙂
Best regards!
bad credit military loans says: Hi Fellow! I was just searching blogs,and I found yours! I like it!
If you have a moment, please visit my bad credit military loans site.
Good luck!
Anonymous says: There are so many variables to consider when you’re looking for Credit card debt relief.
Anonymous says: Debt Settlement
Debt Relief can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
http://www.debt-consolidation.com
Anonymous says: Debt Settlement
Debt Relief can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
http://www.debt-consolidation.com
Anonymous says: Debt Consolidation
Debt Relief can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
http://www.debt-consolidation.com
Anonymous says: Have a card which is useful in countless situations Mother love prepaid mastercard here. It is free.
Anonymous says: Debt Consolidation
Debt Help can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
http://www.debt1consolidation.com
Anonymous says: Debt1consolidation.com can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.
Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.
Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.
Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, companies can take advantage of that benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes these fees are near the state maximum for mortgage fees. In addition, some unscrupulous companies will knowingly wait until a client has backed themselves into a corner and must refinance in order to consolidate and pay off bills that they are behind on the payments. If the client does not refinance they may lose their house, so they are willing to pay any allowable fee to complete the debt consolidation. In some cases the situation is that the client does not have enough time to shop for another lender with lower fees and may not even be fully aware of them. This practice is known as predatory lending Certainly many, if not most, debt consolidation transactions do not involve predatory lending.
Credit card debt is an example of unsecured consumer debt, accessed through plastic credit cards.
Debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest and penalties when the consumer does not pay the company for the money he or she has spent.
The results of not paying this debt on time are that the company will charge a late payment penalty (generally in the US from $10 to $40) and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in “default”. The late payment penalty itself increases the amount of debt the consumer has.
When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default.
If the customer is carrying an amount of debt that is so high that it is over their credit limit, then they might be charged an over-the-limit fee of up to $39 until their balance is paid down to below their credit limit. This, too, may add to the consumer’s debt.
Sometimes the late fees, over-the-limit fees, high annual percentage rates (APRs), and universal default overcome consumers who frequently do not pay off their debt, and the customer declares bankruptcy. If a customer files for bankruptcy, the credit card companies are required to forgive all or much of the debt, unless such discharge of debt is successfully challenged by one or more creditors, or blocked by a bankruptcy judge on legal grounds irrespective of creditors’ challenges.
Because forgiveness of debt reduces likelihood of profit and continued survival, the companies are generally willing to offer another deal to the consumers in danger of bankruptcy. This deal consists of reduced APRs, removal of past late fees and penalty charges, and reaging the accounts so that the credit agencies see them as late accounts.A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user’s account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user). It is also different from a charge card (though this name is sometimes used by the public to describe credit cards), which requires the balance to be paid in full each month. In contrast, a credit card allows the consumer to ‘revolve’ their balance, at the cost of having interest charged. Most credit cards are the same shape and size, as specified by the standard.
A user is issued credit after an account has been approved by the credit provider, and is given a credit card, with which the user will be able to make purchases from merchants accepting that credit card up to a pre-established credit limit. Often a general bank issues the credit, but sometimes a captive bank created to issue a particular brand of credit card, such as or Banks issues the credit.
When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates their consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a Personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a Card not present (CNP) transaction.
Electronic verification systems allow merchants to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or Point of Sale (POS) system with a communications link to the merchant’s acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is in the United Kingdom commonly known as Chip an PIN, but is more technically an EMV card.
Other variations of verification systems are used by eCommerce merchants to determine if the user’s account is valid and able to accept the charge. These will typically involve the cardholder providing additional information, such as the security code printed on the back of the card, or the address of the cardholder.
Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect (see Fair Credit Billing Act for details of the US regulations). Otherwise, the cardholder must pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount owed. The credit provider charges interest on the amount owed (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user’s bank accounts.
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.
For example, if a user had a $1,000 outstanding balance and pays it in full, there would be no interest charged. If, however, even $1.00 of the total balance remained unpaid, interest would be charged on the $1 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made that the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid…i.e. when the balance stopped revolving).
The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, either to encourage balance transfers from cards of other issuers, or to encourage more spending on the part of the customer. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue. As the rates and terms vary, services have been set up allowing users to calculate savings available by switching cards, which can be considerable if there is a large outstanding balance (see external links for some on-line services).
Because of intense competition in the credit card industry, credit providers often offer incentives such as frequent flier points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their program.
Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. However, services are available which alert credit card holders when their low interest period is due to expire. Most such services charge a monthly or annual fee. credit card’s grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 30 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met. Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charge(s) incurred depends on the grace period and balance, with most credit cards there is no grace period if there’s any outstanding balance from the previous billing cycle or statement (ie. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.
For merchants, a credit card transaction is often more secure than other forms of payment, such as checks, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on their credit card payment (except for legitimate disputes, which are discussed below, and can result in charge backs to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant’s employees.
For each purchase, the bank charges a commission (discount fee), to the merchant for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is not always allowed by the credit card consortium.
In some countries, like the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card’s PIN code for identification, and in that case showing an ID card is not necessary.
Authorization: When the cardholders pays for the purchase, the merchant performs some risk assessment and may submit the transaction to the acquirer for authorization. The acquirer verifies with the issuer—almost instantly—that the card number and transaction amount are both valid, and informs the merchant on how to proceed. The issuer may provisionally debit the funds from the cardholder’s credit account at this stage.
Batching: After the transaction is authorized it is then stored in a batch, which the merchant sends to the acquiring bank later to receive payment (usually at the end of the day).
Clearing and settlement: The acquiring bank sends the transactions in the batch through the card association, which debits the card-issuing bank for the transaction amount, and credits the acquirer for the transaction amount minus the interchange fee.
Funding: The acquiring bank pays the merchant. The amount the merchant receives is equal to the transaction amount minus the discount rate charged by the acquiring bank to the merchant for the service.
The entire process, from authorization to funding, usually takes about 2-7 business days. However, many merchant card processors offer next-day deposits to customers subject to type of banking account.
In the event of a chargeback (when there’s an error in processing the transaction or the cardholder disputes the transaction), the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.
Commodity money is any money that is both used as a general purpose medium of exchange and as a tradable commodity in its own right.
Commodity based currencies are often viewed as more stable, but this is not always the case. The value of a commodity based currency as a medium of exchange depends on its supply relative to other goods and services available in the economy. Historically, gold, silver and other metals commonly used in commodity based monetary systems have been subject to regular and sometimes extraordinary fluctuations in purchasing power. This not only damages its stability as a medium of exchange; it also reduces its effectiveness as a store of value. In the 1500s and 1600s huge quantities of gold and even larger amounts of silver were discovered in the New World and brought back to Europe for conversion into coin. As a result, the purchasing power of those coins fell by 60% to 80%, i.e. the prices of goods rose, because the supply of goods did not keep pace with the increased supply of money. In addition, the relative value of silver to gold shifted dramatically downward. Such discoveries of huge sources of gold or silver are a thing of the past, and lend to their supply stability. More recently, from 1980 to 2001, gold was a particularly poor store of value, as gold prices dropped from a high of $850/oz. ($27.30 /g) to a low of $255/oz. ($8.20 /g).It should be noted that gold was not a currency at this time, and was fluctuating due to its status as a final store of value — that is, the price never goes to zero as fiat currencies inevitably do. The advantage of gold and silver, however, lies in the fact that, unlike fiat paper currency, the supply cannot be increased arbitrarily by a central bank.
It is also possible for the trading value of a commodity money to be greater than its value as a medium of exchange when governments attempt to fix exchange rates between different commodity monies. When this happens people will often start melting down coins and reselling the metal used to make them. This has happened periodically in the United States, eventually causing it to move away from pure silver nickels and pure copper pennies. Shipping coins from one jurisdiction to another so that they could be reminted was sometimes a lucrative trade before the advent of trusted paper money.
Commodity money’s ability to function as a store of value is also limited by its very nature. Copper and tin risk rust and corrosion. Gold and silver are soft metals that can lose weight through scratches and abrasions, but this is nothing by comparison to fiat currencies, where billions of dollars can be injected (“printed”) into the market within moments.
Stability aside, commodity-based currencies may have a tendency to restrain growth in a very active economy. For example, in order to maintain the price level, the supply of money in an any economy must be equal or greater than the volume of goods and services produced. If commodities are used as money, then the total production can easily outstrip the supply of those commodities, which leads to price deflation. The lower prices of goods would signal to their producers to reduce the supply of goods, hence restoring the price level. As such, production within commodity-based economies tends to be limited by the supply of the commodity currency.[citation needed]
This problem is compounded by the fact that money also serves as a store of value. This encourages hoarding (in other circumstances known as “saving”)and takes the commodity money out circulation, reducing the supply. The supply of circulating commodity currency is further reduced by the fact that commodity moneys also have competing non-monetary uses. For example, gold and silver are used in jewelry, and nickel and copper have important industrial uses.
Commodity based currencies also limit the geographic extent of the trading market. To make large purchases either a large volume or a high weight or both of the commodity must be transported to the seller. The cost of transportation of the currency raises the transaction cost and makes long distance sales less attractive
Debt1consolidation.com can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.
Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.
Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.
Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, companies can take advantage of that benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes these fees are near the state maximum for mortgage fees. In addition, some unscrupulous companies will knowingly wait until a client has backed themselves into a corner and must refinance in order to consolidate and pay off bills that they are behind on the payments. If the client does not refinance they may lose their house, so they are willing to pay any allowable fee to complete the debt consolidation. In some cases the situation is that the client does not have enough time to shop for another lender with lower fees and may not even be fully aware of them. This practice is known as predatory lending Certainly many, if not most, debt consolidation transactions do not involve predatory lending.
Credit card debt is an example of unsecured consumer debt, accessed through plastic credit cards.
Debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest and penalties when the consumer does not pay the company for the money he or she has spent.
The results of not paying this debt on time are that the company will charge a late payment penalty (generally in the US from $10 to $40) and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in “default”. The late payment penalty itself increases the amount of debt the consumer has.
When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default.
If the customer is carrying an amount of debt that is so high that it is over their credit limit, then they might be charged an over-the-limit fee of up to $39 until their balance is paid down to below their credit limit. This, too, may add to the consumer’s debt.
Sometimes the late fees, over-the-limit fees, high annual percentage rates (APRs), and universal default overcome consumers who frequently do not pay off their debt, and the customer declares bankruptcy. If a customer files for bankruptcy, the credit card companies are required to forgive all or much of the debt, unless such discharge of debt is successfully challenged by one or more creditors, or blocked by a bankruptcy judge on legal grounds irrespective of creditors’ challenges.
Because forgiveness of debt reduces likelihood of profit and continued survival, the companies are generally willing to offer another deal to the consumers in danger of bankruptcy. This deal consists of reduced APRs, removal of past late fees and penalty charges, and reaging the accounts so that the credit agencies see them as late accounts.A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user’s account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user). It is also different from a charge card (though this name is sometimes used by the public to describe credit cards), which requires the balance to be paid in full each month. In contrast, a credit card allows the consumer to ‘revolve’ their balance, at the cost of having interest charged. Most credit cards are the same shape and size, as specified by the standard.
A user is issued credit after an account has been approved by the credit provider, and is given a credit card, with which the user will be able to make purchases from merchants accepting that credit card up to a pre-established credit limit. Often a general bank issues the credit, but sometimes a captive bank created to issue a particular brand of credit card, such as or Banks issues the credit.
When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates their consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a Personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a Card not present (CNP) transaction.
Electronic verification systems allow merchants to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or Point of Sale (POS) system with a communications link to the merchant’s acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is in the United Kingdom commonly known as Chip an PIN, but is more technically an EMV card.
Other variations of verification systems are used by eCommerce merchants to determine if the user’s account is valid and able to accept the charge. These will typically involve the cardholder providing additional information, such as the security code printed on the back of the card, or the address of the cardholder.
Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect (see Fair Credit Billing Act for details of the US regulations). Otherwise, the cardholder must pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount owed. The credit provider charges interest on the amount owed (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user’s bank accounts.
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.
For example, if a user had a $1,000 outstanding balance and pays it in full, there would be no interest charged. If, however, even $1.00 of the total balance remained unpaid, interest would be charged on the $1 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made that the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid…i.e. when the balance stopped revolving).
The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, either to encourage balance transfers from cards of other issuers, or to encourage more spending on the part of the customer. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue. As the rates and terms vary, services have been set up allowing users to calculate savings available by switching cards, which can be considerable if there is a large outstanding balance (see external links for some on-line services).
Because of intense competition in the credit card industry, credit providers often offer incentives such as frequent flier points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their program.
Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. However, services are available which alert credit card holders when their low interest period is due to expire. Most such services charge a monthly or annual fee. credit card’s grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 30 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met. Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charge(s) incurred depends on the grace period and balance, with most credit cards there is no grace period if there’s any outstanding balance from the previous billing cycle or statement (ie. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.
For merchants, a credit card transaction is often more secure than other forms of payment, such as checks, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on their credit card payment (except for legitimate disputes, which are discussed below, and can result in charge backs to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant’s employees.
For each purchase, the bank charges a commission (discount fee), to the merchant for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is not always allowed by the credit card consortium.
In some countries, like the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card’s PIN code for identification, and in that case showing an ID card is not necessary.
Authorization: When the cardholders pays for the purchase, the merchant performs some risk assessment and may submit the transaction to the acquirer for authorization. The acquirer verifies with the issuer—almost instantly—that the card number and transaction amount are both valid, and informs the merchant on how to proceed. The issuer may provisionally debit the funds from the cardholder’s credit account at this stage.
Batching: After the transaction is authorized it is then stored in a batch, which the merchant sends to the acquiring bank later to receive payment (usually at the end of the day).
Clearing and settlement: The acquiring bank sends the transactions in the batch through the card association, which debits the card-issuing bank for the transaction amount, and credits the acquirer for the transaction amount minus the interchange fee.
Funding: The acquiring bank pays the merchant. The amount the merchant receives is equal to the transaction amount minus the discount rate charged by the acquiring bank to the merchant for the service.
The entire process, from authorization to funding, usually takes about 2-7 business days. However, many merchant card processors offer next-day deposits to customers subject to type of banking account.
In the event of a chargeback (when there’s an error in processing the transaction or the cardholder disputes the transaction), the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.
Commodity money is any money that is both used as a general purpose medium of exchange and as a tradable commodity in its own right.
Commodity based currencies are often viewed as more stable, but this is not always the case. The value of a commodity based currency as a medium of exchange depends on its supply relative to other goods and services available in the economy. Historically, gold, silver and other metals commonly used in commodity based monetary systems have been subject to regular and sometimes extraordinary fluctuations in purchasing power. This not only damages its stability as a medium of exchange; it also reduces its effectiveness as a store of value. In the 1500s and 1600s huge quantities of gold and even larger amounts of silver were discovered in the New World and brought back to Europe for conversion into coin. As a result, the purchasing power of those coins fell by 60% to 80%, i.e. the prices of goods rose, because the supply of goods did not keep pace with the increased supply of money. In addition, the relative value of silver to gold shifted dramatically downward. Such discoveries of huge sources of gold or silver are a thing of the past, and lend to their supply stability. More recently, from 1980 to 2001, gold was a particularly poor store of value, as gold prices dropped from a high of $850/oz. ($27.30 /g) to a low of $255/oz. ($8.20 /g).It should be noted that gold was not a currency at this time, and was fluctuating due to its status as a final store of value — that is, the price never goes to zero as fiat currencies inevitably do. The advantage of gold and silver, however, lies in the fact that, unlike fiat paper currency, the supply cannot be increased arbitrarily by a central bank.
It is also possible for the trading value of a commodity money to be greater than its value as a medium of exchange when governments attempt to fix exchange rates between different commodity monies. When this happens people will often start melting down coins and reselling the metal used to make them. This has happened periodically in the United States, eventually causing it to move away from pure silver nickels and pure copper pennies. Shipping coins from one jurisdiction to another so that they could be reminted was sometimes a lucrative trade before the advent of trusted paper money.
Commodity money’s ability to function as a store of value is also limited by its very nature. Copper and tin risk rust and corrosion. Gold and silver are soft metals that can lose weight through scratches and abrasions, but this is nothing by comparison to fiat currencies, where billions of dollars can be injected (“printed”) into the market within moments.
Stability aside, commodity-based currencies may have a tendency to restrain growth in a very active economy. For example, in order to maintain the price level, the supply of money in an any economy must be equal or greater than the volume of goods and services produced. If commodities are used as money, then the total production can easily outstrip the supply of those commodities, which leads to price deflation. The lower prices of goods would signal to their producers to reduce the supply of goods, hence restoring the price level. As such, production within commodity-based economies tends to be limited by the supply of the commodity currency.[citation needed]
This problem is compounded by the fact that money also serves as a store of value. This encourages hoarding (in other circumstances known as “saving”)and takes the commodity money out circulation, reducing the supply. The supply of circulating commodity currency is further reduced by the fact that commodity moneys also have competing non-monetary uses. For example, gold and silver are used in jewelry, and nickel and copper have important industrial uses.
Commodity based currencies also limit the geographic extent of the trading market. To make large purchases either a large volume or a high weight or both of the commodity must be transported to the seller. The cost of transportation of the currency raises the transaction cost and makes long distance sales less attractive
Anonymous says: Normally, you have to pay back a payday loan on or before your next payday (usually in two weeks or less). The amount you can borrow is usually limited to 30 percent of the net amount of your pay cheque. The net amount of your pay cheque is your total pay, after any deductions such as income taxes. For example, if your pay cheque is $1,000 net every two weeks, your payday loan could be for a maximum of $300 ($1,000 x 30%).
Before giving you a payday loan, lenders will ask for proof that you have a regular income, a permanent address and an active bank account. Some payday lenders also require that you be over the age of 18.
To make sure you pay back the loan, all payday lenders will ask you to provide a postdated cheque or to authorize a direct withdrawal from your bank account for the amount of the loan, plus all the different fees and interest charges that will be added to the original amount of the loan. The combination of multiple fees and interest charges are what make payday loans so expensive (Click here for an explanation of the various fees associated with these types of loans.
The lender should also ask you to sign a loan agreement. If the lender does not offer to give you a copy of the loan agreement, ask for one. Read this document carefully before signing it, and keep a copy for your records
How and when do I pay back the loan?
A payday loan agreement usually says that you must pay the total amount you owe for the loan on or before the date stated in your loan agreement. This includes the amount you borrowed, plus interest and any additional fees and charges.
Some lenders will cash your postdated cheque or process your direct withdrawal on the day the loan is due. However, some lenders may require that you pay the loan in cash, on or before the due date.
If you have not paid the loan in cash by the due date, some lenders may cash your cheque or process the direct withdrawal you signed on the day after your loan’s due date, and charge you another fee. Ask the lender what the most inexpensive way is for you to repay your loan.
How does a payday loan affect my credit report?
Credit-reporting agencies collect information on whether or not you make your payments on time. This information, also called your “credit history”, is part of your credit report and is used to calculate your credit score.
Making payments on time can help improve your credit score by demonstrating that you are able to manage your debt. Even if you have poor credit, you can rebuild it by using a credit card or other type of credit and paying back the money you owe on time.
This is not the case with payday loans. Since payday lenders are not currently members of the main credit-reporting agencies, getting a payday loan and paying it off on time will not improve your credit score. However, if you do not pay your loan back on time and it is sent to a collection agency, this will likely be reported to a credit-reporting agency and could have a negative impact on your credit report.
How much will a payday loan cost?
A payday loan is much more expensive than most other types of loans offered by financial institutions such as banks or credit unions. Before you apply for a payday loan, find out about all the fees and charges you will have to pay — including the fees you will be charged if you cannot repay the loan on time. The fees may not be easy to see right away, so read the agreement carefully before signing it. If you do not receive an explanation of all of the fees, charges and interest that will apply to the loan, or if you are not satisfied with the explanation you receive, do not sign the loan agreement.
How does the cost of a payday loan compare with other credit products?
Payday loans are much more expensive than other types of loans, including credit cards. But how much are you really paying? How does the cost of a payday loan compare with taking a cash advance on a credit card, using overdraft protection on your bank account or borrowing on a line of credit?
Let’s compare the cost of using different types of loans. We’ll assume that you borrow $300, for 14 days. Note the considerable difference in the cost of each type of loan.
Things to consider before you apply for a payday loan
Even if you think you may be turned down, ask your bank or credit union for overdraft protection on your bank account, or a line of credit. These are relatively inexpensive ways of obtaining access to extra funds, for short-term use.
If you are turned down for any of these credit options, ask why. If the reason is that you have a poor credit history, contact the three credit-reporting agencies to get a copy of your credit report. Read the reports carefully to make sure that all of the information in it is correct. If you find any errors, contact the credit-reporting agency to find out how you can have the information corrected. The three major credit-reporting agencies in Canada are Equifax Canada, TransUnion Canada and Northern Credit Bureaus. All three of these agencies will give you a copy of your credit report for free if you request that it be sent to you by regular mail.
Ask yourself if you really need to take out a loan, or whether you can get by until your next pay cheque. If you need the money immediately, try to make other arrangements. For example, you may be able to cash in vacation days. Or you might consider getting a short-term loan from a family member or a friend.
If you find that you need to apply for a payday loan because you have no alternative, only borrow an amount that you are 100 percent sure you can repay on the due date of the loan.
Don’t borrow more than you need.
Things to consider if you take out a payday loan
Don’t be afraid to ask a lot of questions. Read carefully — and take home with you — a copy of the loan agreement that you are being asked to sign. Don’t feel pressured to sign the loan agreement right away if you have questions and want more time to read through the agreement on your own. If the lender does not want to give you a copy of the agreement, look for another lender.
Be sure to ask about all the fees, charges and interest that apply when you first get the loan, and what other charges you will owe if you can’t pay the loan back on time.
If you are taking out a payday loan at another location to pay back the first payday loan, or you are extending or “rolling over” the loan that you had with the same lender, you could find yourself in serious financial difficulty. The fees, charges and interest will add up quickly on these types of loans, which can put you into serious debt.
How can I figure out the cost of each type of loan?
To estimate the total cost of a loan, including the annual cost of the loan expressed as a percentage of the amount borrowed, follow the steps below.
Step 1:
Determine how much interest you will pay. First, find out the annual interest rate that applies to the loan (if there is one). Figure out the daily interest rate by dividing the annual interest rate of the loan by 365 days. Then, multiply that rate by the length of time you are taking the loan. Finally, multiply the result by the amount you will borrow, in dollars:
Amount of interest
= Annual interest rate
——————————————————————————–
365 days × Length of the loan
(number of days) × Amount of the loan
Step 2:
Determine the total cost of the loan by adding any fees that may apply to the interest you will have to pay. Find out what fees apply to the loan and add them to the cost of the interest, found in Step 1:
Total cost of the loan = Amount of interest + Total fees
Step 3:
Estimate the annual cost of the loan, expressed as a percentage of the amount borrowed. First, divide the total cost of the loan, found in Step 2, by the amount of the loan. Then, divide this rate by the length of time you are taking the loan (in days) and multiply it by 365 (the number of days in the year):
Annual cost of the loan (%)
= Cost of the loan
——————————————————————————–
Amount of the loan ÷ Length of the loan
(number of days) × 365 days
Let’s find out the cost of a $300 payday loan, taken for 14 days.
We’ll assume that the lender charges you a one-time set-up fee of $10 and a service fee of $40, which includes interest on the loan.
Step 1:
Determine how much interest you will pay. In this case, there is no interest fee. The interest is therefore $0.
Step 2:
Figure out the cost of the loan by adding together any fees that apply and the interest you will have to pay. In this case, you would add the $10 set-up fee and the $40 service fee together:
$10 + $40 = $50
Step 3:
Estimate the total annual cost of the loan, expressed as a percentage of the amount borrowed:
Annual cost of the loan (%)
= Cost of the loan
——————————————————————————–
Amount of the loan ÷ Length of the loan
(number of days) × 365 days
= $50
———— ÷ 14 days × 365 days
$300
= 4.35 or approximately 435%
The total cost of the payday loan would be $50 with an annual cost of 435 percent of the amount borrowed.
Information asymmetries are common in credit market models, but the usual assumption,
at least in commercial lending, is that borrowers are the better informed party and that
lenders have to screen and monitor to assess whether firms are creditworthy. The opposite
asymmetry, as we assume here, does not seem implausible in the context of consumer lending.
“Fringe” borrowers are less educated than mainstream borrowers (Caskey 2003), and many
are first-time borrowers (or are rebounding from a failed first foray into credit). Lenders
know from experience with large numbers of borrowers, whereas the borrower may only have
their own experience to guide them. Credit can also be confusing; after marriage, mortgages
are probably the most complicated contract most people ever enter. Given the subtleties
involved with credit, and the supposed lack of sophistication of sub-prime borrowers, our
assumption that lenders know better seems plausible.
While lenders might deceive households about several variables that influence household
loan demand, we focus on income. We suppose that lenders exaggerate household’s future
income in order boost loan demand. Our borrowers are gullible, in the sense that they can
be fooled about their future income, but they borrow rationally given their beliefs. Fooling
borrowers is costly to lenders, where the costs could represent conscience, technological costs
(of learning the pitch), or risk of prosecution. The upside to exaggerating borrowers’ income
prospects is obvious—they borrow more. As long as the extra borrowing does not increase
default risk too much, and as long as deceiving borrowers is easy enough, income deception
and predatory—welfare reducing—lending may occur.
After defining predatory lending, we test whether payday lending fits our definition. Payday
lenders make small, short-term loans to mostly lower-middle income households. The
business is booming, but critics condemn payday lending, especially the high fees and frequent
loan rollovers, as predatory. Many states prohibit payday loans outright, or indirectly,
via usury limits.
To test whether payday lending qualifies as predatory, we compared debt and delinquency
rates for households in states that allow payday lending to those in states that do not. We
focus especially on differences across states households that, according to our model, seem
more vulnerable to predation: households with more income uncertainly or less education.
We use smoking as a third, more ambiguous, proxy for households with high, or perhaps
hyperbolic, discount rates. In general, high discounters will pay higher future costs for a
given, immediate, gain in welfare. Smokers’ seem to fit that description. What makes the
smoking proxy ambiguous is that smokers may have hyperbolic, not just high, discount rates.
Hyperbolic discount rates decline over time in a way that leads to procrastination and selfcontrol
problems (Laibson 1997). The hyperbolic discounter postpones quitting smoking,
or repaying credit. Without knowing whether smokers discount rates are merely high, or
hyperbolic, we will not be able to say whether any extra debt for smokers in payday states
is welfare reducing.2
Given those proxies, we use a difference-in-difference approach to test whether payday
lending fits our definition of predatory. First we look for differences in household debt
and delinquency across payday states and non-payday states, then we test whether those
difference are higher for potential prey. To ensure that any such differences are not merely
state effects, we difference a third time across time by comparing whether those differences
changed after the advent of payday lending circa 1995. That triple difference identifies any
difference in debt and delinquency for potential prey in payday states after payday lending
was introduced.
Our findings seem mostly inconsistent with the hypothesis that payday lenders prey on,
i.e., lower the welfare of, households with uncertain income or households with less education.
Those types of households who happen to live in states that allow unlimited payday loans
are less likely to report being turned down for credit, but are not more likely, by and large,
to report higher debt levels, contrary to the overborrowing prediction of our model. Nor are
such households more likely to have missed a debt payment in the previous year. On the
contrary, households with uncertain income who live in states with unlimited payday loans
are less likely to have missed a debt payment over the previous year. The latter result is
consistent with claims by defenders of payday lending that some households borrow from
2Consistent with a high discount rate, Munasinghe and Sicherman (2000) discover that smokers have
flatter wage profiles and they are willing to trade more future earnings for a given increase in current earnings.
Gruber and Mulainathan (2002) find that high cigarette taxes make smokers ”happier,” consistent with
hypberbolic discount rates (because taxes help smokers commit to quitting). DellaVigna and Malmendier
(2004) show how credit card lenders can manipulate hyperbolic discounters by front-loading benefits and
back-loading costs.
payday lenders to avoid missing payments on other debt. On the whole, our results seem
consistent with the hypothesis that payday lending represents a legitimate increase in the
supply of credit, not a contrived increase in credit demand.
We find some interesting differences for smokers, but those differences are harder to
interpret in relation to the predatory hypothesis without knowing apriori whether smokers
are hyperbolic, or merely high, discounters.
We also find, using a small set of data from different sources, that payday loan rates
and fees decline significantly as the number of payday lenders and pawnshops increase.
Reformers often advocate usury limits to lower payday loan fees but our evidence suggests
that competition among payday lenders (and pawnshops) works to lower payday loan prices.
Our paper has several cousins in the academic literature. Ausubel (1991) argues that
credit card lenders exploit their superior information about household credit demand in their
marketing and pricing of credit cards. The predators in our model profit from their information
advantage as well. Our concept of income delusion or deception also has a behavioral
flavor, as well, hence our use of smoking as a proxy for self-control problems. Brunnermeier
and Parker (2004), for example, imagine that households choose what to expect about future
income (or other outcomes). High hopes give households’ current “felicity,” even if it
distorts borrowing and other income-dependent decisions. Our households have high hopes
for income, and they make bad borrowing decisions, but we do not count the current felicity
from high hopes as an offset to the welfare loss from overborrowing.
Our costly falsification (of household income prospects) and costly verification (by counselors)
resemble Townsend’s (1979) costly state verification and Lacker andWeinbergs’ (1989)
costly state falsification. The main difference here is that the falsifying and verifying comes
before income is realized, not after.
More importantly, we hope our findings inform the current, very real-world debate,
around predatory lending. The stakes in that debate are high: millions of lower income
households borrow regularly from thousands of payday loan offices around the country. If
payday lenders raise household welfare by relaxing credit constraints, anti-predatory legislation
may lower it.
Payday lenders make small, short-term loans to households. The typical loan is about $300
for two weeks. The typical fee is $15 per $100 borrowed. Lenders require two recent pay
stubs (as proof of employment), and a recent bank account statement. Borrowers secure
the loan with a post-dated personal check for the loan amount plus fees. When the loan
matures, lenders deposit the check.
Payday lending evolved from check cashing much like bank lending evolved from deposit
taking. For a fee, check cashiers turn personal paychecks into cash. After cashing several
paychecks for the same customer, lending against f uture paychecks was a natural next step.
High finance charges is the main criticism against payday lenders. The typical fee of $15
per $100 per two weeks implies an annual interest rate of 15×365/14, or 390 percent. Payday
lenders are also criticize for overlending, in the sense that borrowers often refinance their
loans repeatedly, and for ”targeting” women making the transition from welfare-to-work
(Fox and Mierzewski 2001) and soldiers (Graves and Peterson 2004).
Despite their critics, payday lending has boomed. The number of payday advance offices
grew from 0 in 1990 to 14, 000 in 2003 (Stegman and Harris 2003). The industry originated
$8 to $14 billion in loans in 2000, implying 26-47 million individual loans. Rapid entry
suggests the industry is profitable.
Payday lenders present stiff competition for pawnshops, even though the internet, namely
E-bay, significantly foreclosure costs for pawnshops (Caskey 2003). The number of pawn
shops in the U.S. grew about six percent per year between 1986 and 1996, but growth
essentially stalled from 1997 to 2003. Prices of shares in EZCorp, the largest, publicly
traded pawn shop holder, were essentially flat or declining between 1994 and 2004, while
Ace Cash Express share prices, a retail financial firm selling check cashing and payday loans,
rose substantially over that period (Figure 4). EZCorp CEO, Joseph Rotunday, blamed
payday lenders for pawnshops’ dismal performance:
The company had been progressing very nicely until the late 1990s…. (when)
a new product called payroll advance/payday loans came along and provided our
customer base an alternative choice. Many of them elected the payday loan over
the traditional pawn loan. (Quoted by Caskey (2003) p.14).
Payday lending is heavily regulated (Table 1). As of 2001, eighteen states effectively
prohibited payday loans via usury limits, and most other states prices, loan size, and loan
frequency per customer (Fox and Mierzwinski 2001). Note that the payday loan limit ranges
from 0 (where payday loans are illegal) to 1250. Nine states allow unlimited payday loans.
Payday lenders have circumvented usury limits by affiliating with national or state
chartered banks, but the Comptroller of the Currency—the overseer of nationally chartered
banks–recently banned such affiliations. The Federal Deposit Insurance Corporation still
permits payday lenders to affiliate with state banks, but recently restricted those partnerships
(Graves and Peterson 2005).
Regulatory risk—the threat of costly or disabling legislation in the future—looms large for
Payday lenders. The Utah legislature is reconsidering its permissive laws governing payday
lending. North Carolina recently drove payday lenders from the state by expressly outlawing
the practice.
Heavy regulation increases the cost of payday lending. High regulatory risk increases limits
entry into the industry and increases the expected return required by industry investors.
Driving up costs and driving away investors may be exactly what regulators intended if they
view payday lending as predatory.
We define predatory lending as a welfare reducing provision of credit. Households can be
made worse off by borrowing if lenders can deceive households into borrowing more than is
optimal. Excess borrowing reduces household welfare, and may increase default risk.
We illustrate our concept of predatory lending in a standard model of household borrowing.
Before we get to predatory lending, we review basic principles about welfare improving
lending, the type that lets households maintain their consumption despite fluctuations in
their income.
The model has two periods: today (period zero) and payday (period one. Household income
goes up and down periodically, but not randomly (for now): income equals zero today
and y on payday. If households consume Ct in period t, their utility is U (Ct).Household welfare
is the sum of utility over both periods: U (C0)+δU (C1), where δ equals the household’s
time rate of discount. Households with high δ value current consumption highly relative to
future consumption. In other words, high discounters are impatient.
A digression here on discount rates serves later discussion. In classical economics δ is
constant. If δ changes over time, so does household behavior, even if nothing else changes.
If δ(t) is hyperbolic, households will postpone unpleasant tasks until current consumption
does not seem so precious relative to future consumption (Laibson 1997). With hyperbolic
discounting, that day never arrives, so hyperbolic discounters have behavioral problems: they
procrastinate. They may never repay debt, much less begin saving. Hyperbolic discounters
who start smoking may never quit.
Returning to the model, if the marginal utility of consumption (U 0) is diminishing, households
will demand credit to reduce fluctuations in their standard of living. Households
without credit, however, must fend for themselves (autarky). Welfare under autarky equals
U(0)+δU (y). The fluctuations in consumption for households without credit make autarky
a possible worst case, and hence, a good benchmark for comparing cases with credit.
If households borrow B at interest rate r, welfare equals U (B) + δU (y − (1 + r)B).
Borrowing increases utility in period zero, when the proceeds are consumed, but lowers utility
in period one, when households pay for their borrowing. Rational, informed households trade
off the good and bad side of borrowing; they borrow until the marginal utility of consuming
another unit today just equals the marginal, discounted disutility of repaying the extra debt
on payday:
U 0(B) = δ(1 + r)U 0(y − (1 + r)B). (1)
Equation (1) determines household loan demand as a function of their income, their
discount rate, and the market interest rate: B(y, δ, r). For standard utility functions,
household loan demand is increasing in income and decreasing in the discount factor and
interest rate: By > 0; Bδ < 0; Br < 0. Household welfare with optimal borrowing equals U (B(y, r, d))+δU (y − (1+r)B(y, r, δ)). As long as households follow (1), their welfare with positive borrowing must be higher than without (autarky). The welfare gain from borrowing depends on the cost of credit production. Suppose the cost of lending $B to a particular household equals (1 + ρ)B + f, where ρ represents the opportunity cost per unit loaned and f is the fixed cost per loan. Think of f as the cost of record-keeping and credit check required for each loan, however large or small the loan may be. If the going price for loans is (1+r) per unit borrowed, the lenders’ profits equal (r − ρ)B − f. With perfect competition among lenders, the loan interest rate is competed down until it just covers the costs of the loan: r = ρ + f /B. Equilibrium r and B are determined where that credit supply curve equals demand (1). Equilibrium in the payday credit market is illustrated in Figure (3). If fixed costs per loan are prohibitively high, the market may not exist. Perhaps the payday lending technology lowered the fixed cost per loan enough to make the business viable.3 Before the advent of payday lending, households who applied to banks for a very small, short-term loan may have been denied. Fixed costs per loan imply that smaller loans will cost more per dollar borrowed than larger loans. That means households with low credit demand will pay higher rates than households with high loan demand. Loan demand is increasing in income, so high income households who demand larger quantities of credit will enjoy a ”quantity” discount, while lower income households will pay a ”small lot” premium, or penalty. That price ”discrimination” is not invidious, however; the higher cost of smaller loans reflects the fixed costs of lending. The high price of payday loans may partly reflect the combination of fixed costs and small loan amounts (Flannery and Samolyk 2005). A usury limit lowers household welfare. Suppose the maximum legal interest rate is r. At that maximum rate, the minimum loan that lenders’ cost is f /(r− ρ) = B. Low income households with loan demand less than B face a beggar’s choice: borrow B at r or do not borrow at all. Such households would be willing to pay more to to avoid going without credit, so raising the usury limit would raise welfare for those households. Competition is another key determinant of how much households gains from borrowing. 3Alternatively, or additionaly, the demand for small, short term loans may have increased in the mid 1990s. The welfare reform then almost certainly increased demand for such credit as households who once ”worked” at home for the government were forced to go to work in the market. Even with no competition — monopoly—households cannot be worse off than under autarky. The monopolist raises interest rates until the marginal revenue from higher rates equals the marginal cost from lower loan demand: B(y, r) = −(r − ρ)Br(y, r). (2) At that monopoly interest rate, rm, household loan demand equals B(y, rm).Household welfare under monopoly equals U (Br(y, rm))+δU (y −(1+rm)Br(y, rm)). Welfare is lower under monopoly because credit costs more and their standard of living fluctuates more (because costly credit reduces their demand for credit) If households borrow from the monopolist, however, they must better off than without credit. In sum, welfare for rational households is highest if credit is available at competitive prices. If households choose to borrow, they must be at least as well off as they were without credit. Limiting loan rates cannot raise household welfare and may reduce it. Monopoly lenders lower household welfare, but even with a monopolist, households cannot be worse off than without credit. The high cost of payday lending may partly reflect fixed costs per loan. Before payday lending, those fixed costs may have been prohibitive; very small, short-term loans may not have been worthwhile for banks. The payday lending technology may have lowered those fixed costs, thus increasing the supply of credit to low income households demanding small loans. That version of the genesis of payday lending suggests the innovation was welfare improving, not predatory. In the textbook model household welfare cannot be lower than under autarky because households are fully informed and rational. Here we show households how can be made worse off than without credit if predatory lenders can delude households about their (households’) future income. Suppose that by spending C(τ ), lenders can convince a prospective borrower that her income on payday will be y +τ. The cost C can be interpreted variously as the cost of a guilty
A view from Silicon Valley 
Hey, you have a great blog here! I’m definitely going to bookmark you!
I have a connecticut debt consolidation
site/blog. It pretty much covers connecticut debt consolidation
related stuff.
Come and check it out if you get time 🙂
Hey, interesting!
Visit my site too, relating to credit card processing companies site. It pretty much covers credit card processing companies and other related stuff.
Check it out later 🙂
Just thought i would say hi from Japan. Doing some blog surfing and found your site. Im looking for some cool styles of best credit card rate for my own blog. Theres some really amazing blogs about. if you have time check out my site you will find information on best credit card rate. Well when i get my blog running hope you come and check it out.
Your message on consolidation is great! I have a site on consolidate debt services
Your readers might find interesting. You can check it out at: http://www.apexconsolidation.com
Hey, this blog is neat. I already added it to my favorites. I have a site that pretty much covers unsecured credit card web site related stuff.
debt consolidation versus debt negotiation Get out of debt Now! Stop paying high interest rates! debt consolidation versus debt negotiation
consumer debt consolidation will help you get out of debt forever! consumer debt consolidation consumer debt consolidation
Search this thing – it is hilarious how people cant even spell right when they are selling something on eBay
Misspelledauctions.com
Thanks for the info. If you are interested in digital camera sale.
Then have a look at digital camera sale
Hey. Saw your site as listed in H1B Visas and Tech Graduates and also found it in a page about class friends at SchoolBuddies.com. Do you ever trade links?
Browsed onto a friends page at SchoolBuddies.com. that talked about high school homecoming sent me here. Not sure what I clicked on. Oh well… So how long have you running your own website? later, Dave
sent Straight to your Inbox for your Convenience, you wont have to Search the Internet day after day…
Hey, you have a great blog here! I’m definitely going to bookmark you!
I have a **Marketing strategies**blog. It pretty much covers Marketing Strategeis articles related stuff.
Come and check it out if you get time 🙂
Nice Blog, well done.
Here an interesting Site regarding:
Debt Consolidation, Debt Consolidation information, Personal Debt Consolidation, Debt Settlement
Need traffic? get thousands of visitors, I got it, you need it advertising controversy television
hey did you know you can get a free ipod pretty easily?
just go to http://www.getipodsforfree.com, sign up and do an offer
With personal debt in the US at an unprecidented level, the good news is that help is at hand for those carrying the burden, in the form of the US Debt Help Manual, produced by the (PRWEB) October 2005__The US Debt Help Manual, produced by The Debt Counsellors. is a free, no_nonsense guide.
If your site is of similar interest contact me and link sites.
Debt Resources Services.
Love the blog! This is my new favorite, you took over my previous favorite site: electronic reviews
Hi, Thanks for your interesting blog. Keep up the great work! I also have a site & blog about credit cards for bad credit, please feel free to visit.
One of a kind! Thanks.
Came across your blog by chance while searching for site traffic.
http://www.1st-choice-4-website-traffic.com
site traffic
Credit Repair Learn how to repair your credit with a selection of books and web links.
http://www.repaircredit411.com/
Congratulations Friend for your excellent blog on credit center!Keep up the good work!
If you have a moment, please visit my site:
credit center
I send you my warm regards and wish you continued success.
Have a nice day! 🙂
Hi there, ##NAME##, now that’s a different blog. That’s the fun about blogging – everyone does it differently.Thanks. Rex ##LINK##
Debt consolidation loans can help you reduce debt
You have put in soo much effort. Good for you. I have a debt consolidation website. Number one debt consolidation on the Internet!
Debt Consolidation Debt Consolidation Programs can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period
I just came across your blog and wanted to
drop you a note telling you, Friend, how impressed I was with it.
I give you my best wishes for your future endeavors.
If you have a moment, please visit my site:
loans center
It covers loans center related contents.
All the best!
Hi, Thank you for having this info on the web. I enjoyed your post. If you may have any interest in