Fed's Rate Cuts Bring No Relief For Consumers' Credit Card Bills

[cal04]

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/10/AR2008021002537.html?hpid=topnews

The Federal Reserve's dramatic rate cuts were expected to make it cheaper for consumers to use credit cards. But credit card interest rates remain high and in many cases have even climbed.

Bruised by a rise in foreclosures, banks have been reluctant to lower rates for cardholders who have missed payments or had their credit scores slip, analysts and industry watchdogs said. Yet even some cardholders who pay on time have not benefited from the Federal Reserve's recent actions, as banks raise rates and fees to make up for losses in their mortgage departments, analysts said.

"Not everyone is going to get a rate decrease," said Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group, a Washington-based consumer advocacy organization. "People presume that because the Fed lowers rates, the banks will."

The increases have perplexed customers such as Richard Davis, an insurance agent who lives in Fairfax County who said the annual percentage rate on his Chase Business Visa card went from 8 percent to 24 percent in December, three months after the Fed's first rate cut. "That just floored me," he said.

[Elspeth]

1. Always the way..

:(

[still_one]

2. No, and they won't. What they may do is provide relief from those who have adjustable mortgages /nt

[AdHocSolver]

3. The rate cuts were DESIGNED to increase corporate profits at the expense of bank customers.

Lower Fed interest rates were designed to reduce the amount of interest paid to bank depositors. The Fed never intended for the banks to reduce credit card interest charges. Since the "prime rate" was set low, it meant that the banks had an "excuse" to pay depositors less interest on CD's and savings accounts.

Since the banks were paying practically nothing to depositors for all this cash, they could afford to pay slightly lower, but still usurious, interest rates to their credit card customers. This allowed the banks to "compete" among themselves in their advertising, but still make out like bandits for anyone carrying any kind of credit card balance. The "spread" between what they where paying depositors and what they were charging borrowers was (and still is) enormous.

Another purpose of low Fed interest rates being used as an excuse by banks to pay their depositors practically nothing was to induce people to take their life savings out of banks and put it into the stock market. All of these middle class people throwing money at the stock market insured that stock prices would rise (law of suopply and demand). This all occurred during the technology boom so everyone expected to make big money. The model was Enron. Throw enough money at any stock and it will drive the price up, even if the company's profits are due to cooking the books.

Since deregulation allowed the banks to advise the public on investing in the stock market, and even buy and sell stocks for customers, the banks could use their customers' cash to manipulate stock prices to their own advantage, and they did. The banks could use their clients cash to raise and lower the prices of stocks that they wanted to invest for themselves. Under laws set up under FDR, this kind of manipulation was prohibited, because it was partly responsible for the meltdown in 1929.

Now that the banks have used up all their cash reserves buying "worthless" subprime mortgages, they have to replenish these cash reserves to maintain their business. So with their great banking expertise, they are trying to build up their cash reserves by making credit card holders pay back their "loans" at a faster rate by increasing the interest rates.

However, most people are maxed out on their credit cards already. Increasing the interest rates may look good on paper, but it will put the card holders into a position of defaulting on their debts. The bankers are making the same mistake that they made by loaning money for mortgages to people who would have a hard time paying it back.

I would never claim that bankers possessed any special acumen for money matters. I worked for a bank years ago. Corporate executives, as a group, never impressed me as having superior intelligence or practical expertise. However, I was especially surprised that bankers seem to have a lock on the low end of the scale.