How to Charge Interest on Credit

This weekend, in the New York Times Magazine an economic reporter for the newspaper writes about his own credit crisis.  The image of people who are in default of their mortgages or credit cards is not an economic reporter for the New York Times.  But, what this deeply personal narrative tells us is that this current credit crisis is 9 parts greed of financial institutions and 1 part not thinking in the case of most borrowers.

But as I read this story and listened to the ongoing policy debate about reigning in credit card companies I am struck with the idea of risk.  Traditionally, lenders charge more interest to borrowers who the lender deems to be a risk, that is, less likely to pay off their debt.  The worst credit score the higher the interest.  Which if you stop and think about this is counterintuitive.  The people with the least amount of resources (generalizing that people who have less money have lower credit scores) are asked to pay the most amount in interest, thus further diminishing their already scarce incomes.  

What if we turned that around?  As it turns out, many wealthy people are highly leveraged, in other words, they borrow a lot of money.  But because they have high incomes, they are able to manage that debt.  But what if we charged those who are able to pay a higher interest rate for credit and those who have little income, less interest?  So, what if someone who gets a credit card limit for $1000 only pays 9% interest and someone with a credit card limit of $100,000 pays 20%?  

It seems to me the proposals being bandied about are nibbling around the edges of how credit card companies make money.  Despite the threats that if they are further regulated credit to people with less than stellar credit ratings will not get credit, these companies make billions on issuing credit cards to people ravaged by the economy.  The proposed legislative side boards on the credit card companies will do nothing to fundamentally change the system.  We need to not only re-think "risk," but we also need to look at the whole idea of credit scores and credit rating systems.  The arbitrary and insurmountable institutional way that credit scores are determined (just ask me about a friend who was recently told he was dead) should be carefully examined and perhaps scrapped for some sort of method arising out of microlending, where communities hold the debtor accountable for paying back the obligations.

It just seems that the status quo hasn't been working for a lot longer than this recent debacle.