What do credit-card interest rates reflect?

May 22, 2009

Next time someone tries to justify those 28% credit-card interest rates by talking about the highly-granular and ultrawonky credit analysis that the card companies do, just point them to this post at Rortybomb. Or, if that’s too long and wonky, just ask them why all that highly-granular and ultrawonky credit analysis seems to treat everybody exactly the same way: 2 days late on your credit-card payment, and boom, your interest rate skyrockets.

Mike’s also right that Steve Waldman’s distinction between transactional credit and revolving credit is a crucial one which all too often gets elided in the credit-card debate. And the elision is largely the credit card companies’ own fault: they don’t make it easy to pay your bill in full each month, and they do make it easy to think “I can buy this now and use my upcoming paycheck to pay for it, and not pay any interest” — a very dangerous line of thinking indeed, for most of us.

My dream is that eventually cellphones will replace credit cards as the primary source of transactional credit: you pay for things using an RFID chip in your phone, and then just pay your phone bill every month. If you don’t have the money to hand, then you tap some kind of credit and borrow it, and you can’t kid yourself that that credit is actually transactional. The distinction between transactional and revolving credit would become much clearer, and the regulations on credit cards would make even more sense than they do now. But I fear it’ll be a long time until we get there.


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