The credit-card burden

By Felix Salmon
October 8, 2009
news about the drop in consumer credit made sense to me: if people are saving more, that means they're likely to be paying down their debts. But one thing jumped out at me in the official statistical release: it had figures going back to 2004 for credit-card interest rates, and the latest numbers are the highest of the lot.

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Yesterday’s news about the drop in consumer credit made sense to me: if people are saving more, that means they’re likely to be paying down their debts. But one thing jumped out at me in the official statistical release: it had figures going back to 2004 for credit-card interest rates, and the latest numbers are the highest of the lot.

The release doesn’t have intra-year data, though, so I looked back at the historical data. It turns out that credit card interest rates, for people assessed interest, hit a low of 11.96% in February 2003; they then rose slowly to a high of 15.24% in August 2007. After that, they went back down: they were 13.36% in November 2008. But in the three quarters since then they’ve risen sharply, and are now back up to 14.90%.

I suspect that what’s going on here is partly that limited-time teaser rates are expiring, and consumers aren’t getting new credit-card offers into which they can roll over their debts; it’s surely also a function of card companies raising rates unilaterally while they’re still allowed to.

So what’s happening to credit-card interest payments? When revolving credit hit its peak, in the third quarter of 2008, there was $975.2 billion outstanding, with average credit-card interest rates at 11.94%. Multiply the two, and you get $116.4 billion: that’s not a real number for interest payments, since many people pay off their credit cards in full, but at least it allows for a back-of-the-envelope apples-to-apples comparison. Today, outstandings have fallen to $899.4 billion, but rates have risen to 13.71%: multiply those two, and you get $123.3 billion — it’s gone up, rather than down.

I hope that the rising credit-card interest rates, along with the positive savings rate and the fact that credit card balances can’t be paid off with low-cost home equity lines any more, mean that the current decline in credit-card balances continues for a long time to come. What’s more, once the new rules come in later this year, credit-card companies won’t be able to continue to simply decide to raise their interest rates any more. But if you needed another reason to pay down those credit cards, this is a good one: your rates have gone up sharply, and they almost certainly won’t come down any time soon.

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