Increased Credit Card Rates – Another Price We Pay for Other’s Poor Decisions
Banks and lending institutions make poor decisions and the average consumer has to pay the price. That seems to be the theme of what is going on in America right now. Homes are being foreclosed on because average consumers can’t pay the adjusted rates imposed on them by mortgage companies that presented them as a good deal for lower credit score buyers. Freezes in the credit market resulting from the high number of defaulted loans and mortgages have forced manufacturers to cut production and lay off workers, putting tens of thousands out of work. And now credit card companies are raising interest rates on customers with good credit to help them pay for the losses they’re getting on defaulted cards they issued to those with poor credit. Does any of this make any sense at all?
There was once a time in this country when if you paid your bills on time you were rewarded by your creditors with lower rates and easier access to loans and financing. It was the way that the credit system was designed and it made perfect sense to everyone because it was the right way to do business. Loan applications were screened thoroughly and houses were sold to people who could afford to pay for them. Credit cards were issued to those who had good credit scores and paid on time by those who wanted to maintain those scores. Low income people applied for government help instead of being scammed by private market gimmicks. It sounds like a fairy tale in this day and age but being rewarded for paying your bills on time was once a standard practice in America.
In a recent article published in the business section of the LA Times, a consumer writes that despite paying their credit card bills on time for twelve years, their credit card company chose to raise their annual percentage rate from 8.9% to 14.65%. That’s an increase of 5.75%. The credit card companies claim that this helps to offset their losses from defaulted credit cards and loans but the question remains. Why should the consumer who pays their bills on time have to pay for those who don’t pay at all? More importantly, why aren’t these lending institutions taking the loss themselves? It was they who approved credit cards for people at risk of default in the first place. I’m sure if you look at their list of outstanding balances there won’t be a whole lot of surprises on who wasn’t able to pay.
The Federal Reserve has already issued new rules that limit rate hikes, but those rules don’t go into effect until 2010. Many consumers are already suffering under high interest rates and are having difficulty paying off existing balances in an already difficult financial environment. President Obama has met with leaders in the credit and banking industry and has made it clear that he will pursue further legislation that prohibits random rate hikes and hidden fees by lenders. Members of Congress and the Senate have also re-introduced the “Credit Cardholder’s Bill of Rights”, a piece of legislation that would ensure that any new regulations go into effect ninety days from the day they are signed into law, not one year later as the current system allows. Another measure being reviewed is putting limitations on advertising fixed rates without specifically stating a time frame those rates will be available.
All of these steps being taken to protect the consumer now are great to see but many people are still going to be in the same boat for some time to come. Credit scores will drop when cardholders drop their high rate credit cards and transfer balances to lower rate cards. Banks will threaten to restrict credit access or charge higher fees but they will have to conform eventually if they want to stay in business. When the smoke finally clears and the dust settles we might actually see something we haven’t seen in over three decades: consumers paying cash and not maxing out credit cards they can’t afford to make the payments on.
