More Credit, More Trouble

Editor’s Note: This article previously appeared in a different format as part of The Atlantic’s Notes section, retired in 2021.

Paige Marta Skiba, a law professor at Vanderbilt Law School, responds to our May cover story on shrinking middle-class wealth:

The problem is not just high interest credit cards. In the last two decades, Americans have experienced a meteoric rise of alternative financial services like payday loans, installment loans and auto-title loans. As an economist, I’d like to think this increase in choice of credit products is a good thing, especially for your typical borrower—a middle-class worker without savings or many traditional options for borrowing after a few credit hiccups.

But because we forget to pay on time, we procrastinate and we fail to predict the predictable shocks to our budget, more credit options can mean more trouble.

Lenders knowledgeable about behavioral economics craft loan terms that take advantage of the inveterate biases that cause nearly all of us to make financial mistakes. In addition, technological advances in the last twenty years have enabled lenders to easily screen for acceptable applicants at lightning speed and to experiment to perfect their underwriting rules. Lenders can now offer a variety of alternative financial products to their diverse customer base and are able to quickly adapt to changes in demand or the political landscape.

Regulators have failed to keep pace with these trends. For example, the Consumer Financial Protection Bureau publicly vowed to restrict payday lending practices numerous times, including this week, but has yet to enact any payday regulation. This lag has given lenders plenty of time to scale back their payday operations and turn their business focus to other (less transparent and even more expensive) loans that are not the subject of much regulation. Changes in credit card markets may have started us down the road to a shrinking middle class, but our own cognitive biases, lenders’ savvy and regulators’ slow reaction time are big parts of the story, too.