

Unintended Consequences: Credit Card Interest Rates now Much Higher - cwan
http://www.theatlantic.com/business/archive/2010/08/credit-card-interest-rates-much-higher/61934/

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MichaelSalib
Credit card interest rates don't generally relate to default probabilities in
a sane way, as Mike Konczal explains here:
[http://rortybomb.wordpress.com/2009/05/22/credit-card-
reform...](http://rortybomb.wordpress.com/2009/05/22/credit-card-reform-does-
my-credit-cards-interest-rate-mean-anything/)

There is no rational model that relates your credit card interest rate in a
reasonable way to your own actions. If you send in a $5 payment two days late,
that's often treated the same as sending in a $5000 payment one month late.
But any sane bank officer will tell you that these two events are vastly
different when it comes to default probabilities. Credit cards in the US are
an insane debt instrument, and ideally, people would use them only for
providing transactional credit and not for loans.

Its funny, given the wealth of data available to credit card providers, they
have the ability to carefully fine tune rates to a decent estimate of loss
probabilities. If that happened, you'd see rates smoothly transition along a
curve in response to your actions rather than see-sawing between two or three
rates. But pricing in default risk isn't the goal since defaults are great for
credit card companies. The more you default, the more fees and interest they
can tack on, and many borrowers will end up paying most of that back. It is so
much more profitable to earn $5000 on a debt of $1000 after all, even if you
have to wait 2 or 3 years to actually get it.

------
ww520
My card rate is -2% since I got 2% rebate on every purchase, 3%-5% for certain
things like gas.

~~~
dminor
This is pretty important - if you're not paying for everything with a rewards
card, you're subsidizing those of us who do.

~~~
oasisbob
Yes, exactly. This is why rewards cards are ultimately so evil: they're based
on a bastardization of an incentive structure that needs to die.

Rewards payouts are funded by interchange fees which are paid by the
retailer... aka the consumer. If you use rewards cards, your rewards payment
is subsidized by populations whom don't use rewards cards.

The whole reason interchange fees existed in the first place was to move some
of the costs of operating the networks away from banks to merchants. Merchants
have a natural incentive to accept cards (sales!), while banks originally
didn't have the same incentive to offer them. Interchange fees were meant to
level the field.

In a competitive environment, interchange fees should go down and reach an
socially efficient level. Instead, the US has the highest interchange fees in
the world due to network consolidation and the four-party system catering to
banks, not to merchants.

IIRC, the average US household pays ~$400/yr in interchange fees. Rewards
cards are silly and I'm glad they'll be dying a slow death soon.

------
smoody
Funny thing is, mine recently went down. Obama's bill has made it illegal for
credit card companies to continue to penalize you with higher interest rates
for a late payment made more that six months ago (as I understand it). I
called my credit card co and told them they have no reason for having my
interest rate at 28%+ when I made one late payment years ago over the life of
my card (15 years or more?). They dropped my rate to 9.9% three minutes later.
I highly recommend calling them and asking them why your rate is so high --
especially if you have a late payment in your past that is more than six
months old. And, if you've made a late payment recently, put an alarm in your
calendar to call them six months from now. This was an awesome thing the Obama
admin did that can save americans millions of dollars, but does anyone
appreciate it or take advantage of it?

~~~
CWuestefeld
I think you've missed the point of the article. The law prevents the CC
companies from doing any statistical analysis to assess the higher costs to
the greatest risks. That means that people who pose a lower default risk will
have to pay just as much as those that pose a higher risk.

You might think it's great, but that's because somebody else is paying the
cost of your default risk.

~~~
smeatish
They are allowed to do statistical analysis using such factors as credit score
and amount of debt. The difference is that now they can't increase your rate
on existing balances. They can still raise your rates, but only if you want to
borrow more from them and don't opt to pay off the balance at the previous
rate.

This seems much more transparent to me - you are selling a fixed-rate bond,
rather than borrowing at a rate subject to their whim.

~~~
CWuestefeld
You make a good point, but I don't think it's completely correct.

I think what you're missing is that the period of the loan from the CC is also
open-ended. With a conventional loan, the lender knows that he'll be repaid
(i.e., risk goes to 0) at the end of the term (30 year mortgage, 5 years for a
car, etc.).

With the CC, the borrower may be holding those funds pretty much forever. This
means that the lender is assuming more risk: first, that at some point way
down the road the borrower will default; and second, that changes in the cost
of capital make the CC "loan" unprofitable. This latter risk is much more
acute today, precisely because interest rates are so low. If the CC rate is
calculated to be profitable based on (e.g.) today's prime rate, then there's
every possibility that 10 years down the road it's going to be a lousy deal
for the CC company.

So as I said (but not for precisely my original reasons) you're putting more
risk on the CC company. And the CC company has to recoup the costs of that
risk somehow.

------
Apreche
Who cares? I wouldn't care if my credit card interest rate was %100. I always
pay it off in its entirety every month. I will never carry a balance, and thus
never accrue interest, unless there's a real emergency. If there's a real
emergency, the amount of money it costs is not really a concern, the emergency
is. That's what makes it an emergency, it's more important than money.

A credit card to me is just a convenient way to buy things online and in
person without having to deal with cash. IMHO, if you ever carry a balance in
a non-emergency situation, you're part of the problem, and you deserve to pay
that higher interest rate.

Don't buy things you can not afford.

~~~
telemachos
_Don't buy things you can not afford._

This is a fine rule to aim for (prudent for individuals and all that), but it
makes me wonder. If everyone in the world (and the nations of the world)
actually began to live by this advice, wouldn't that trigger an immense
depression? (When responding, please take me at my word: I'm not consciously
posting flame-bait; I'm just truly ignorant when it comes to economics.)

~~~
mediaman
An increase in the savings rate has significantly negative effects on GDP
growth in the short-term. So, if the US suddenly lived within its means, it
would cause/worsen a short-term depression.

In the long-run, a bigger capital base can create more technology and/or
capital investment, which improves productivity, which improves standards of
living.

~~~
CWuestefeld
I agree with your conclusion, but part of your logic is faulty. You seem to be
assuming that all savings takes the form of holding debt from others, e.g.,
bonds. But that's only one possibility. You can also save by owning equity in
others, e.g., stocks.

However, I don't want somebody else to own equity in my house, rather me
having a normal mortgage.

At the very least, such a change would cause all kinds of liquidity problems,
and would certainly cause the significant negative effects you predict.

------
James-Foster
The end result of this regulation will be more transparency in borrowing
costs, and nothing more. From a pure economics point of view, it doesn't make
sense that the overall cost of having/using a credit card will be any higher
for any given class of risk since this regulation doesn't affect the overall
risk of lending to any given credit class. Competition ensures this.

In other words, people in the credit class of FICO 800 or better should not
see any additional increase in their interest rate, while less credit-worthy
people who in the past were charged more hidden fees, will see an increase in
interest rate to recoup the lost revenue needed to justify lending at that
class of risk.

If there is currently an overall upward trend in the cost of having/using a
credit card, this would be attributable to something entirely different, say a
smaller overall pool of lendable capital due to a weaker economy, or maybe a
regulatory change that did impact the risk of lending, bankruptcy reform for
example...

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jpablo
My card rate is and always has been 0 and it's the way it should be.

~~~
BigZaphod
As is mine. Why waste money on interest? If you don't have enough to pay for a
thing, you shouldn't buy the thing.

~~~
jrockway
I agree with you, and I think it's because we spend our money on technology.
When you buy the latest gadget immediately, it just becomes obsolete. When you
save up to buy the latest gadget, a better one comes out before you're done
saving. So you get a better a gadget and have more money for more gadgets.

I guess a lot of people want to have the "latest and greatest" for fashion
reasons, and credit cards are appealing for that reason. I did that in college
and it took me like a year of having a real job to pay it off. Sadly, other
people never do pay it off.

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ubernostrum
Obligatory warning: Megan McArdle has a long and well-documented history of
playing somewhat loosely with her facts in order to make political points.
Bear that in mind when considering arguments she makes.

~~~
CWuestefeld
I think that in making an _ad hominem_ argument like that, you ought to at
least provide documentation rather than just sling accusations.

In my experience, her reasoning has been sound and I'm not aware of a high
degree of factual errors in her writings.

If you're right, please help us understand. Otherwise you sound like a
partisan yourself.

~~~
ubernostrum
I've posted an example in response to one of the other comments. In the future
I'd appreciate it if you'd refrain from conflating source criticism with _ad
hominem_ attacks; someone who has, in the past, been demonstrated to
misrepresent or misreport facts in service to political goals is an unreliable
source, and there's no fallacy in pointing this out.

~~~
CWuestefeld
_I'd appreciate it if you'd refrain from conflating source criticism with ad
hominem attacks_

I only conflate them because a criticism of the source (as opposed to a
criticism of the argument, or objection to a fact) _is_ an _ad hominem_
attack.

See wikipedia: <https://secure.wikimedia.org/wikipedia/en/wiki/Ad_hominem>

_An ad hominem, also known as argumentum ad hominem (Latin: "to the man"), is
an attempt to link the validity of a premise to a characteristic or belief of
the person advocating the premise._

You cite an (alleged) characteristic of Ms. McArdle, that she's had factual
errors in the past. You have not even mentioned the facts of this article:
your argument is based on that characteristic of Ms. McArdle. QED

~~~
ubernostrum
An _ad hominem_ attack is, or is usually understood to be, fallacious and as
such an invalid point. But bringing up a past record of unreliability in a
given source is neither fallacious nor invalid; it is in fact extremely
relevant when considering how carefully to examine claims made or how
thoroughly to check sources cited.

In other words: "this person has been known in the past to
misrepresent/misreport things" is perfectly valid to point out, as such a
source should be taken with a grain of salt and subjected to scrutiny. Megan
McArdle is one such source.

~~~
CWuestefeld
I went back and looked at your original post. You said _Bear that in mind when
considering arguments she makes._

Based on this, I think I may have been a little harsh. You didn't cite
specifics in her history, nor did you make specific objection to the argument
or facts of the OP. However, you also didn't explicitly say they're wrong; you
advised vigilance. As there's nothing wrong with that, I now think I owe you
some apology.

That said, I still believe that you came across like a partisan mudslinger.
And I stand by my claim that an effort to defeat an argument by addressing its
author rather than its argument or facts, is by definition an _ad hominem_
attack.

If you go read the OP, you'll find that it's really an exercise in balance.
There's not much factual in it, nor does there need to be. Nor does she really
come out on one side of the argument or the other. All she's saying is that
the situation isn't as simple as "the government identified a problem and
fixed it for us", and I think she makes that point well.

------
salemh
Silly article when CC co's last year raised the majority of card holders rates
to 29.99% unless they chose to "cancel" that card, locking in the previous
rate. Much of the hikes were done even to those with no "cause." Meaning, a
missed / late payment, recent foreclosure, etc.

I also called and asked my CC companies why they were continuing to raise my
rates..late payment that year = rate hike of 10%.

------
korch
Thank God all my CCs are already jacked all the way up to 28% interest rates,
so they can't ass fuck me anymore than I already am being ass fucked. (Before
the Republican Randroid's come out of the wood work to tell me it's my own
fault—it is, I know, but like a lot of Americans, in the past couple years
we've had no choice but to use CC's for necessary living expenses.)

My top goal right now is to live cheap, pay off all debt, and never again take
on any debt. Ever. Debt is a fool's game, like any well-designed casino, "the
house always wins." Hopefully an enormous number of Americans will learn this
lesson and do likewise, and utterly punish the banks where it counts—on their
bottom line. It wasn't too long ago that American's were amongst the most
frugal and biggest savers in the world, which laid the foundation for a great
cultural-Puritan work ethic.

