Wednesday, May 25, 2011

Bad Credit? No Credit? No Problem!

Credit is a fickle, fickle mistress. Used the way it's meant to be used, you can break down one gigantic payment into a number of smaller, more manageable payments.

But, as so many people have so harshly learned, there are so many ways credit can come back to bite you. And when it bites, it bites down hard. The Jews in the Old Testament had a novel way of overcoming this. Deuteronomy 15 describes a process where, once every seven years, all debts were cancelled. That simple. The system could, conceivably, be gamed by simply not extending credit as the cancellation day drew near, but this is addressed in Deuteronomy 15:9- "Be careful not to harbor this wicked thought: “The seventh year, the year for canceling debts, is near,” so that you do not show ill will toward the needy among your fellow Israelites and give them nothing. They may then appeal to the LORD against you, and you will be found guilty of sin."

While that essentially was the invention of bankruptcy, we're not quite that lenient these days. Debtors must pay, and creditors must collect.

This story is not about the debtor. Kind of.

W.T. Grant was a dying 25-cent store. (The price point has altered over the years to reflect the times, from Woolworth's beginning the format at the five-and-dime price point, to today's dollar stores.) Poor, uneven design of new stores, and insistence on paying dividends no matter what the balance sheet said, had brought them to the brink by the late 1960's. In an effort to get sales numbers back up, W.T. Grant decided they would set up a generous credit program.

Quite generous.

36-month, $1-per-month repayment plan generous.

In addition, while some companies today advertise that they don't require a credit check, Grant actually meant it. Every single customer was offered credit at the register. Every single one. In fact, if a customer wanted, they could open up multiple credit lines simply by going to multiple stores. The store managers, failing to properly communicate with each other, would not know that the person they were offering credit already had it.

And they had plenty of places to go. Grant had a concurrent plan to open stores in places competitors weren't. Between 1969 and 1973, Grant opened 369 stores in small towns.

Suffice to say that there was a reason the competition wasn't in those places.

Not that the store managers were in much of a position to care where customers got their credit or how many lines they had, just so long as one of those lines was with them. They were under an incentive program for the ages. On one hand, managers were offered a $1 bounty for every customer that was signed up. On the other hand, they had quotas to meet. Managers did not want to miss these quotas. Missing these quotas might mean getting served beans instead of steak at the next promotion dinner. Or getting a pie thrown in their face. Or getting their tie cut off. Or being dressed in a diaper and sent running through a hotel lobby. Or made to push a peanut across the floor with their nose (the last one via Cultural Anthropology: A Problem-Based Approach by Richard H. Robbins).

Of course, the problem about extending credit is making sure people pay the debt back. If they don't pay the debt back, you've essentially given them free stuff. Allow this to happen too often, and you soon run out of merchandise with no money to purchase more. (There are of course the issues with usurious interest rates, but as we've long since established, they do not apply here.) In order to prevent people not paying the debt back, one would do well to not extend credit to people unlikely to repay.

Grant, meanwhile, was offering credit to "every deadbeat who breathed." Even the fact that a large and growing number of accounts showed bad debt was obscured by Grant's accounting system, which would every so often consolidate those multiple accounts from customers into a single account. Every newly-consolidated account was labeled current at the end of the process, even if no component account actually was at the beginning. Two delinquent accounts would be merged into one account in good standing. A customer that was delinquent could also refinance their account and pay a tiny amount of money to make it current again. Remember that the original plans could be for 36 months with $1 minimum payments.

Shockingly, this didn't work.

In 1974, the credit system was scrapped. But by then, the damage was done. They had reached the point where, as it was warned two years earlier, "Grant would run out of money if it paid all of its bills" (as told in the 1975 case Morgan Guaranty Trust Company of New York v. Charles G. Rodman, as Trustee of the Estate of W. T. Grant). The rest of Grant's story consists of various banking maneuvers to keep the company afloat, none of which were able to dig them out of the gigantic hole they'd created for themselves. Eventually, the banks just stopped extending credit.

Something W.T. Grant might have learned from, had they survived the lesson.

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