Thoughts about credit card rates & the bankruptcy bill

[housewolf]

Some thoughts on credit card fraud from a fellow academic, Corinne Cooper:

Interest rates are made up of three things:

1. The cost of money (interest goes up and down based, in part, on the supply of and demand for money, just like any commodity.)
2. The expected inflation rate (so the lender gets back its money in constant dollars)
3. A risk premium.

If I apply for a credit card (and I get an average of 5 solicitations a week), the rate that I qualify for is around 9%. Given a fed funds rate of 2.5% (the "cost" of money) and relatively low inflation projections (let's assume 2%), the difference is . . . (drum roll) THE RISK PREMIUM. For the best borrowers, the credit card companies collect over 4% to account for the risk of non-payment.

For riskier borrowers, the credit card interest rate is much higher, often as high as 29%: that's a 24% risk premium.

Think of it as the premium that you pay to insure the bank against your non-payment.

Here's what' so strange:

<snip>

http://www.talkingpointsmemo.com/bankruptcy/archives/2005/03/index.php#005044

[Warpy]

1. Exactly.

Back in the good old days, credit cards charged 18.9%. They all did. If people charged a vacation to Aruba and took six months to pay it off, the credit card company made a fairly sizeable chunk of money.

Then came the oil shocks and the double digit interest rates that threw us out of work and stopped inflation. All of a sudden, with 30 year mortgages going at 20%, those high credit card rates didn't look so good.

So they started getting sweetheart deregulation legislation in the 80s. First, they got the rates raised. Then, in the late 80s, they got permission to charge all sorts of junk fees for infractions like late payments when insufficient time was given to the cardholder to settle the bill by mail. They also came up with that "minimum payment" scam, assuring people that if they mailed in a minimum payment before they got the bill, they wouldn't get stuck with a late charge and suckering them into a habit that would stretch the loan out to 30 to 40 years before it could be paid off, again maximizing their profit at a 20+% interest rate.

Now they've really gotten spectacularly greedy, and can rase the rates seemingly endlessly if you're late paying ANYTHING, ANYWHERE, even if the fault lies with the postal service and not you. People who thought that plasma TV was a great deal at the comeon rate of 6.9% interest are quickly finding out the maximum rate is 39.5% and that they have no recourse should the credit card company arbitrarily jack it up that high.

The lesson: cut those damned things up NOW. Pay them off as fast as you can if you're running a balance. Learn to do without the easy credit. If you need a consumer loan, go to a BANK and put up collateral and get a fixed rate. J

Just don't let them scam you, because they will if you keep those cards.

[housewolf]

2. Thanks for the interest rate history

and for the good advice about credit cards.

[flygal]

3. Great summary!

I watched the Frontline show on cc's and you got the jist of it all right there. I was 20 making min. wage and got my first cc. I should have known better. Three years later I had $3000 in debt - but some really cool Gucci hand bags :rolleyes:

It took another three years of hard work to pay them off - the only thing that helped was having self confidence that I didn't NEED so much expensive crap. So many people are stuck in the rut that they have to have what's being marketed to them.

One huge problem I see is eating out. Most meals for a couple or a family are going to run $30-40. It's easy to drop $500 a month just on eating out. STAY HOME people!! Or eat at a local deli once in a while - but stay away from Outback and the like.

[Phoebe Loosinhouse]

4. This is what comes of having no usary laws

Credit cards will throws millions of over-leveraged middle-class Americans into bankruptcy which will roll over into real-estate foreclosures which will roll into major economic upheaval. You can see it coming like a train wreck.

Because of the limitless greed of the credit card issuers, they have become no great improvement on payday loan stores or your friendly neighborhood loan shark. The 2 major traps waiting to crush the strapped are: Check 24 and the concept of universal default. Check 24 has effectively eliminated the whole concept of "the check is in the mail" (which I really have no quarrel with) which will ensnarl the careless or the innocent bad checkbook reconcilers with mammoth cascading bad checks and associated bank fees which will probably cause some of their accounts to run overdue which will throw them into universal default with their credit cards which will cause them enormouse interest hikes which they will not be able to pay which will cause them to borrow and leverage even more until they crash and burn under the weight of it all and even then they will have no relief from bankruptcy and no credit and no hope and a bleak future.

Without credit you may not be able to get a decent job or rent a decent shelter. You will end up living in a hotel or motel efficiency apartment at 2 or 3 times the rate of a true rental. You will live solely on ramen noodles.

[FloridaPat]

5. Actually we do have usary laws. The bad news is it applies to you

and me, not the credit card companies and banks. We can't charge over 10% for a loan.