You’ve got to wonder what the banks have in mind now that they’ve raised credit card rates to an average 14.7 percent, up 160 basis points from a year ago. Are lenders perhaps trying to tell us that they are no longer interested in advancing cash to users of plastic? After all, what shopper or diner would borrow a dime with a credit card if it carried such an exorbitant interest charge? And even if there were borrowers at such usurious rates, how many of them could be counted on to service their loans indefinitely (which is how long it would take to pay off such loans)? It’s not as though the banks can go after delinquent borrowers with such time-honored tools of the loan shark as baseball bats, brass-buckled belts and straight razors.
Still, we have to assume the banks know their business and that they think they can make a profit by charging economically lethal rates on unsecured balances. But if you or I were making such loans, we’d probably be asking ourselves up-front, How desperate does someone have to be to run up credit-card debt at 14.7%? The answer, obviously, is: the kind of person we would not want to lend money to. So why are the banks doing it anyway? It’s possible that although they don’t actually know how things will play out, they believe they’ve pegged rates high enough to compensate for new regulations that will make it more difficult for them to lend as they traditionally have – i.e., with the same loving kindness and respect for their customers as Frankie the Camel and rent-to-own furniture stores. And who cares about high delinquency rates when there will always be a few customers willing and able to pay $6 for $5 (and presumably much more if there are penalties and fees involved). Although the regulators may have made it harder for banks to assess such charges, they have not been eliminated.
Joe Sixpack’s Fate
However this disaster-in-the-making plays out, it’s obvious that 14.7 percent interest rates are not going to stimulate retail purchases, even though that has always been the ostensible point of credit cards. The inflationists will probably say that loan-shark rates on plastic represent just one more cost that is going up. But because no one – even Las Vegas casinos — can actually afford to borrow at such rates for more than short stretches of time, we would argue the opposite – that credit cards designed to stimulate spending are fast becoming a deflationary pressure point, burdening shoppers with real rates of interest that are more than triple what the average hedge fund is returning these days. Under the circumstances, Joe Sixpack will be biting off more than he can chew if he opts to make only minimum payments for perhaps three or four months.
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I see the recent increase in credit card interest rates as the last gasp of the banking sector to salvage their earnings in the short term.
I have seen rates on cards increase by 50-100% without explanation or provocation. As others have mentioned, this type of increase is unsustainable and eventually the people will rebel against the inherent injustice in the banks borrowing money at 1% or less, and then turning around to lend it to them at 20%.
I think the credit card market will suffer a split between the credit worthy and the overextended, where the banks will lose their good customers and end up with a portfolio of nothing but deeply indebted individuals that are poor credit risks. A good credit card customer with enough money to pay their bills in full each month will be disgusted at the increases — and either cancel their cards or move their purchases to cards that don’t act like plastic loan sharks. The bad customer will continue to run up debt, and once a late payment is made (or exceeding the credit limit, or whatever triggers an account “reset”) causing the bank to jack up interest rates to 29.99% – the rage will be immediate. It wouldn’t be unreasonable for the bad customer to think “Hey, they’re just trying to screw me over with the 30% interest — so why don’t I screw them first? They deserve it anyway…” — right before he takes cash advances and makes large purchases to run the card to its limit. After all, if you’re going to default, you might as well default big, right?
A simple case in point: I had a credit card that I used for my business for many, many years. My average annual purchases on that card were around $100,000; I always paid my bills on time and the balance was paid in full every other month (due to the way my cash flow works). I was a good customer, giving the bank their percentage on my large transaction amounts and paying a little bit of interest every other month while I waited for my cash flow to cycle in. A few months ago, I was simply too busy to pay attention to everything I should have paid attention to, and I ended up paying my credit card (in full) one day late. My rate tripled to 29%. I was rather offended, so I called the bank to complain. The customer service representative eventually changed my rate back to what it had been — but by then I was extremely unhappy with the bank and how it thought it could treat my account. After hanging up with the rep, I threw the credit card into the shredder and switched all of my purchases to a different account.
The bank will now lose the transaction fees and the interest it had earned on me for the better part of a decade. The bank’s greed has cost them a valuable customer.
People hate the banks, they resent the bailouts and free money given (by the trillions!) to the banks while little is done for “Joe Sixpack”, and they will eventually rebel. It won’t be pretty when it happens.