Opinion

Felix Salmon

The credit-card burden

By Felix Salmon
October 8, 2009

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.

Comments
10 comments so far | RSS Comments RSS

Love your blog, but had an issue with one item today:

You say, “I suspect that what’s going on here is partly that limited-time teaser rates are expiring…”

That doesn’t ring true to me. I’ve had the same card for about a decade, rarely pay interest, and have negotiated the rate down over and over again. Somehow, it always ends up getting raised again.

The banks unilaterally change the contract. It doesn’t take an expiring teaser rate, it just takes them making a decision to gouge you more.

The new law will go into effect soon, and they are setting the table to milk as much out as possible — getting as many as they can with high rates before the Democratic Party’s protections bill kicks-in.

If you were told, “Next week, you’ll lose the ability to do X (to raise revenue)”, what would you do this week?

In fact, there was an article today (somewhere) about Wachovia or Wells Fargo raising rates on all cards by 3%. I suspect that’s a lot of it.

The optimal solution for consumers would be to go shopping as soon as the new regs are in place. I’ll be doing that, and I hope the folks who have been so disrespectful to me for so long lose money.

Posted by DcDan | Report as abusive
 

I think your calculation may be a little *too* simple, unless the average rate you’re using is a weighted average. Consider:
1. Most people have more than one card
2. The cards have different rates
3. Paying off the higher interest one first is smartest, regardless of balance

Assuming card holders are being smart when they pay their bills, then it’s likely the higher than average rate cards have less money on them and the lower than average cards have most of the total. Therefore, the weighted average rate is probably several points lower than 13.71%.

 

The question now becomes is all of this simply due to the recession or is this backlash against the credit card companies actually going to carry over? It’s going to be interesting to see if and when things start going better from an economic standpoint if all is going to be forgiven. It seems like a whole lot gets forgiven when things start going well.

There are encouraging signs though that there is beginning to be a shift in the way that Americans pay for items. Could living within your means actually be hip now? Could spending only what you have be the new black? Its possible, but something tells me its not going to hold. As a society were just too greedy, myself included. The hard lessons we’re learning might take hold while times are still tough, but I know that as soon as everyone stops feeling the pinch its just going to be more of the same old. That’s just the way of the world.

Check out my blog on these statistics and whether or not they reflect a cultural change at….. http://www.thedebtgazette.com/2009/10/co nsumer-shift-from-credit/

 

The problem is how to handle debt. I had just $23,900 left on my mortgage; along comes a credit card company willing to loan me $24,000 at 2.99%. So, said fine and am paying $700 a month, way in excess of the required amount. The money goes out of checking account every month via the internet service so that I don’t have to pay a penalty and postage and am secure that the funds will arrive on the date specified by me. This way, I save about $50 a month in interest charges from my previous mortgage, which I happily donate to a progressive cause every month ( in fact more, but that is not the issue. Some time ago, Citibank loaned me ~$50,000 at 1.99% without any “transfer-fee” for the life of the loan, which of course was paid back. & yet, Citi had to borrow that money at a much higher rate. Of course, both my wife and I would be considered abstemious by “American” standards of consumption. We recycle our food into compost, grow our own vegetables organically. We don’t watch any TV now that it has gone digital: we only watched Bill Moyers when was on.

The problem is that people are bloody stupid. They watch too much TV and sanctify the corporate propaganda of consumption as the “American way of Life.” They are against “socialism.” What is wrong with European socialism? I wish I had not been a damn fool and moveed back to Europe when I had the opportunity.

Posted by kares jhangiani | Report as abusive
 

Discover just sent me a notice raising my rate to 29.66%. This is ridiculous. I have had this account for over 20 years, have an excellent history with them and have a very favorable overall credit score. Nothing in my credit history indicates I am a risk. There is no reason for them to raise the rate. Their actions are so uncalled for that I am not spending my time to try to negotiate with them. I am cancelling my account immediately.

Posted by Karen in San Diego | Report as abusive
 

I’m not sure this is to the point, but I believe it was in the late 60s or early 70s that NY state had a ceiling of 12% on credit card interest. Interest rates elsewhere were rising and I remember the head of some official banking committee convinceing Rockefeller to cancel the limit and allow the ‘free market’ to set rates–they were then sure to find a proper level!!!

Posted by Eli Baker | Report as abusive
 

Get real here is what is going on.
The banks are trying to find any way they can to gouge the customer even more and get as much money as they can.
Its greed on the part of the banks. noting more.
Bank of America BAC is the worst.
They say how they are not going to raise rates now, after just finishing a major increase across the board on all of their cards, and also canceling most of the cards that they thought were not profitable.
This is a joke

Posted by davidinstuart | Report as abusive
 

Stepping back from the credit cards and looking at the banks as a whole, it’s a little troubling that the industry is currently loaning money at anywhere from 5% to 25% or more (mortgages through credit cards), and borrowing it at from 0% to 1% (checking, savings, and the Fed), yet is having trouble turning a profit.

Posted by Ken | Report as abusive
 

The credit card companies now have significant limits on differential rates that can be charged – so they are raising all of their rates charged. The government came in and fixed the system so we all pay more.

 

Credit cards companies are constantly coming up with new ways to attract new users. From no interests to free point systems, users are tempted to pay everything with credit cards. However, to remain debt free, users should remember to make timely payments, and avoid the trap of only paying the minimum sum. Credits cards provide many comforts in life, and being our of credit card debt just requires some responsibility.

Simon – http://www.idpro.co.uk

Posted by simoniddings | Report as abusive
 

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