Many readers have complained of credit card issuers raising interest rates on their cards, even if the customer has pristine credit and never or rarely carries a balance. Now we are finally seeing some efforts to see how significant this is across all card users.
A Rasmussen survey puts the total at 50% of all respondents. Now one can argue, correctly, that banks were too profligate in handing out credit, and some sort of reversal is in order. Yes, but the nature of the banks’ action here is pretty sus. And consumers agree. 77% say banks take unfair advantage (note the wording, not just advantage, but “unfair advantage”) of customers.
First, if the issue was primarily giving too much credit to the wrong people, the first move is to cut back credit to them. There were reports on that activity, but the moves to jack up rates appear to be far more extensive than those to restrict credit (I am still getting offers for new credit cards and both attractively priced and some not so hot balance transfer offers. One from Citigroup was a 3% balance transfer fee and a 1.99% rate for a full year).
More important, these increases appear to be indiscriminate, across broad swathes of customers, and in anticipation of legislation that will restrict their ability to raise rates.
Now I know some readers will argue that people should not use credit cards for borrowings at all. But things are far from black and white. First, credit cards are a very important source of credit for small businesses (indeed, they are an important type of startup funding). Some important issuers who targeted that market, namely American Express and Advanta, have withdrawn completely. Businesses at all levels of the food chain routinely borrow to fund operations and buffer fluctuations in cash inflows and outflows. Second, there is an element of bad faith dealing here. The banks were given TARP funds and other, extensive types of support so they could support the economy via lending. Raising rates to beat the impact of new rules was predictable (the long lead time for implementation of the rules was no accident) but the brazenness of the banks is still remarkable.
From Rasmussen:
Fifty percent (50%) of Americans say interest rates on their credit cards have been raised in the past six months, as Congress seeks to limit the ability of banks to raise those rates.
A new Rasmussen Reports national telephone survey finds that just 31% say the interest rates have not been raised on any of their credit cards in that period. Nineteen percent (19%) aren’t sure.
Sixty-nine percent (69%) of adults say an increase in the interest rate on a credit card makes them less likely to use that card. Twenty-five percent (25%) disagree and say they are not less likely to use a credit card after the interest rate has been raised.
But then 51% of adults say they pay their credit cards in full each month, thereby avoiding any interest payments. However, nearly as many (45%) say they sometimes carry a balance on their cards.
Yves here. The interesting bit is that if consumers follow through with their intentions, some consumers who never carry balances will shift their purchases away from a credit card company that raises rates, maybe out of general principle (or perhaps a view that if the company behaves badly on this front, it may not be accommodating on other fronts, like dealing with billing disputes). Back to the report:
In May of this year, nearly one-out-of-four Americans said they were at least somewhat likely to miss a credit card payment in the next six months
Only 16% say they are carrying more credit card debt than they did a year ago. That’s down five points from December of last year. Thirty-four percent (34%) say they have less credit card debt now, and 46% say their level of debt is about the same.
Twenty-six percent (26%) say they do not know the interest rate their pay on their primary credit card. Sixty-one percent (61%) say they do know that interest rate, but 13% are not sure…
Fifty-seven percent (57%) of Americans say there is a need for more government oversight of the credit card industry…
Twenty-four percent (24%) of Americans say they personally need to cut back on their use of credit cards and other borrowing anyway.
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Yves said…First, if the issue was primarily giving too much credit to the wrong people…
Skippy here…Um that was by design, the lowering of thresholds or they deliberately lowered the bar to enact fees and revolving debt to feed off the charges and interest ad infinity. Pure criminal activity aka fraud, luring in the sheep to shear them, IT was a spreed sheet massacre with pre-intent.
People running businesses with credit cards should firstly save or get a loan to tide them over the first year..right? If you do not have the will power or credit score to archive these two simple tasks, how the fk are you going to run a small business, 5 years running till viable in the old vernacular. If they flash out their cash flow then pity the fool, the should have built a buffer.
Stuff the card company’s they were duplicitous in the first case. They don’t have a leg to stand on and should have the other one cut off for their actions.
Btw not at you just the blood suckers.
Skippy…speed kills especially credit.
Skippy,
There are a fair number of small businesses that are highly seasonal, buy big inventories over summer, sell to wholesale in the fall. Credit enables them to make single large inventory purchases and get a price break. There are plenty of legitimate uses of credit in business that do not constitute being in debt all the time and do (net of credit costs until the banks got greedy) result in a plus to the bottom line.
I know there is a new business model these days, although is this not part of the house of cards we call American enterprise, one fowl wind and smash BK and try again.
Look I hear you, some extend for the promise of tomorrow, but out of this hole crazy enchilada what are we to conclude, wishes come true.
In defense of my statement I would rather have small local banks/credit unions with the ability to fact check/due diligence process the viability of such transactions on the ground. Rather than rent seeking credit card company’s that only look at their spreed sheets. Is this not a more reasonable way to conduct our activity’s, retard easy expansion.
Did not our last Prez BK three enterprises (sucked in a hole lot of venture capital because of his name) only to be picked up by a house for his name with out access to the capital accounts, then Governor, then President, then mother of all deficits.
Skippy…What kind of message are we sending the young, fail up-wards.
PS, still enamored with your edgy self.
Skippy you are correct! The credit was used perniciously and intentionally given to the wrong people so as to enslave them.
Yves falls into the trap of perpetuating a false normalcy when she says;
“First, if the issue was primarily giving too much credit to the wrong people, the first move is to cut back credit to them.”
That is the primary issue — giving too much credit to the wrong people — but not the people she is talking about in the false normalcy, not the “American consumer”. Rather the people that have too much credit are the banks and that credit should be taken away from them entirely. Let’s not forget that the banks have privatized the use of credit by buying the crooked politicians and having them enact fraudulent laws that have given them that power. Common citizens never got up in arms and marched on Washington screaming we want banks to fuck us up the ass with 29% interest! No! The banks, through graft and corruption, have bought the privatized right to enslave others through usury.
What better way to validate that slavery, and deflect from the corrupt process that created it, than to have a fake system pollster provide a poll that gives the appearance that; the “Americans” and “consumers” (terms that are very deflective from what they really are) have a voice, and at the same time ‘normalizes’ their slavery.
The slavery is not normal. We live in a false normalcy created by aggregate generational corruption with the more current corruption being even more pernicious than that of the past (vanilla greed one upped by pernicious greed). It is not normal to let one very small bunch of centralized banking gangsters rape us by forcing us to give them money at 0% and then again forcing us to borrow that same money from them for 29% –THAT IS THE PRIMARY ISSUE!
Money should be loaned direct to citizens at 0%, not to some fat ass scum bag dishonest banker that has fraudulently purchased the scam ‘rule of law’ so as to enable him to enslave others.
And Skippy you are also right about having the ability to fact check and do due diligence of such transactions on the ground locally. You should be able to go to your local Town/City Hall and get a mortgage, or funds for a good business idea, at 0% interest from a local democratically elected finance committee that would be charged with overseeing the quality of life and sustainability of the individual community.
Deception is the strongest political force on the planet.
It was that great man of the people Jimmy Carter who signed the Depository Institutions Deregulation and Monetary Control Act in 1980 that allowed credit card companies to charge any rate of interest they wish. This move coincides with the fundamental change to a credit card culture in America, where nowadays each household averages more than $8000 dollars in outstanding credit card debt. That’s potentially $1500-2000 of interest each year on each household. Ouch — that’s got to hurt.
If there actually were a democracy in America (and note my use of the subjective mood to express doubt on this proposition) it would be a total no-brainer to build a coalition to bring back the anti-usury laws. As it stands, nary a peep.
The banks are shooting themselves in the foot. It’s quite easy to stop using credit cards for everything except perhaps car rentals and flight reservations. This is how people live in most developed nations with healthier economies than ours, and these rate hikes are only going to push this nation toward that model.
Incidentally, next week, PBS’ Frontline discusses the topic. It’s a collaboration between PBS and NYT…
Vinny
Vinny, I respectfully disagree. I agree it is possible to live without credit cards for most purchases but I do not agree that it is likely Americans will stop using their credit cards just because their rate went up 3% (from 15% to 18 or from 21% to 24%). I have no doubt some will, but will enough make the change to offset the interest differential the banks are receiving from the hikes? I doubt it. And of course if you carry a high balance already, whether you stop using credit is immaterial to banks profiting more on your current debt.
My case in point of American profligacy: nearly every article I read concerning household savings states they believe savings will mean from their low levels of the past 10 years. I cannot count how many times I have read that from bloggers, Bloomberg, CNBC, The Economist, etc. However, from where I sit I have watched that savings rate go from a big spike in May up to around 6.5% (when the articles first began proclaiming the “sea change” in behavior) back down to 4% in October I believe (from memory so probably off but the direction is correct). Despite the fact that all logic suggests American consumers should be saving more, there does not seem to be any hard evidence that I can see that it is actually occurring, in fact I see quite the opposite since that original May reading was at the time mostly attributed to the $225 SS check sent out due to the stimulus bill and not to any organic movement by consumers to actually save dollars they earned as opposed to dollars given to them via China et al.
I guess basically my point is don’t expect Americans in aggregate to do anything that makes sense from a perspective beyond what gets them through the next cycle of payments…such is our debt dependent society.
Sadly I concur. The short memory retention of Americans is complete, once an addict always one, save the day habit is transfered.
Skippy…I find it unbelievable thet Americans deride China for its central power when the states is full of it, just with a twist illusion.
I am just a stupid housecat who exposes communists sometimes, but it seems to me that Americans will continue to borrow and spend, regardless of interest rates, double-billing, etc. until noone will loan them money on any terms.
There is another possibility: lots of Americans live on the edge in such a way they CANNOT save more even if they would like to.
Agree with Vinny: I also would cancel the one credit card I have, if I wouldn’t need it to get a rental car about once a year.
If all I had to worry about were FICO scores or incurring the wrath of Paul Krugman for being a predatory saver, I would have no credit cards at all.
In any transaction between a citizen and a Credit Card Bank, the Banks have ALL the power. “Just get rid of your credit cards and live debt free” is just not doable. Without a credit card you can’t rent a car, or purchase an airline ticket. If you travel by AmTrak and you buy your ticket with cash, you’re flagged as a potential terrorist or a drug courier. State and Federal law-enforcement agencies are leg-breakers for the TBTF Loan Sharks.
Until my late wife’s bought with cancer we had never, ever carried any debt of any kind. We saved some $800 to $1,000 dollars a month, every month because both of us worked and we lived well within our means.
After she died I was left with huge medical bills to pay and a 3 year old daughter to raise on my own. Child care and related expenses cost me a fortune. No one to share the duties of child care and the loss of half my household income.
Medical expenses continued to be high for me and my daughter. This is _after_ I paid off my wife’s outstanding bills. It was impossible to save money each month. In fact, I haven’t saved money for 7 years.
As a result I burned through my savings in less than a year.
I had to use credit cards and carry a balance for the first time in my life. I made the monthly payments, but my balance owed never seemed to go down. I was overworked and over stressed and just did not have the time or the energy to carefully go through my statements as I once had. It was all I could do to remember to write a check and mail it in.
After a few years I found myself maxed out on 4 credit cards. When I finally looked at my statements again, my 6.99% to 11% interest rates had skyrockted. American Express was charging me 36% every month. 36 Percent! Chase and Cap 1 were charging me 29.9%
Why were they doing this? Had I failed to pay a bill? No. Never. My crime, as I was to learn only recently, was that my wife had died. The fact that I continued to pay my bills meant nothing to the banks.
Did I feel outrage? No. I felt an altogether different emotion. I felt a deep and profound SHAME. My finances were out of control. It had to be my fault. Maybe I was late and didn’t realize it. Or I was spending too much money. I didn’t know. I knew only that it was MY fault.
I liquidated 70% of the IRA funds my wife and I had accumulated over 16 years in order to pay all my balances to zero. I cancelled all my cards but one. The Visa Card issued by an upstate Credit Union had raised my interest from 11% to 12%. That’s it. Smaller, local banks seem to be old school about concepts like “a deal is a deal.”
It’s only in the last 4 months that I learned why my credit card balances got out of control. I was paying 36% interest compounded daily. The banks used me. They exploited my circumstances. If I was really a credit risk deserving of 36% interest, they should have cancelled my card.
Don’t get distracted by the details of my personal experience over the last 7 years. Because my situation, the reason I fell into near ruinous debt, is really NOT unique.
Credit Card banks and TBTF banks are predatory looters. They have armies of MIT quants and Harvard lawyers on their side. They have such power that they dictate terms to Congress when asking for Trillions in bailout money. Did I say ask? They didn’t ask. They demanded. They declared an ultimatum and our government just rolled over.
This is the same government that’s supposed to protect us from fraud. How the hell can I or anyone else be expected to compete with that?
Yes, some people have no excuse for living beyond their means. But even in the worst cases the banks easily more than 50% responsible.
The banks are corrupt. They charge 36% interest not because the cardholder is that risky, but because they can get away with it! And they can get away with it because the default reaction of virtually every American is to the Blame the Victim.
Why do banks continue to get a pass for their criminal and socially destructive behavior? Will someone please tell me?
Tim in Sugar Hill
I would guess that the other 50% are those who already borrow at the highest interrest rate…
I wish people who used credit cards (from 15% to 27% interest rates – simply outgageous when the banks get FREE money) would only look at the amount of money going to interest. Certainly there are situations where one has to carry a balance – but it should not be an ongong practice. But in general, devoting 25% of your income to interest payments is the path to poverty.
This tremendous amount of money going to banks, in my view, hinders our economy greatly. Banks have proven that they are inefficient, as well as idiotic, and prehaps criminal, allocators of capital.
This incredible use of credit cards under these circumstances either proves that most people are not the “rational actors” that economics posits, or that their financial situation is so dire, that they must borrow to survive.
I have 2 cards don’t have a balance on either and both have raised their rates. One to as much as 30% if I were so foolish as to pay late ( beyond a standard “late charge). Now I would like to tell you that I’ve never been late, but that wouldn’t be true. Once I found a check on my desk that I hadn’t mailed. So if I do that again I think i’m subject to 30%. I used it for everything. Now I use it for nothing. But I don’t dare send it back beacause in today’s world a man without a card is not a full member of our social order. As Yves said you can’t even rent a car. Well, you can’t even rent scaffolding, as I did last month – for cash, but the card was necessary as a guarantee.
What’s more important is when banks borrow at 0 and lend at 30 there is no way they will underwrite govt guaranteed but low margin SBA loans, for exmple.
another twist on just “giving up” your cards:
your FICO score is HEAVILY influenced by how long you have had credit, AND by how long you’ve had individual credit lines (e.g. credit cards) open.
So take me as example. I have 5 or 6 cc’s I think (who knows anymore). I really only use 2. I always pay in full every month (automatically deducted from my bank).
all of my cards raised their rates, most up to 25-30%. Plus added a whole lot of fees including late fees and also more transaction fees (on their checks, etc).
will I get rid of my cards? No. for 2 reasons
1) I never hold a balance anyway
2) it’s a hassle.
3) my FICO score. I’ve had most of them for 15-20 years. If I switch to a new one it “hits” my credit score.
#3 isn’t so important for me anymore because I don’t need credit for anything. (I pay cash for cars and already own my home). but for a lot of younger Americans it IS important. (since they’ll buy their cars and houses using credit… the FICO score will directly affect their payment).
what a tangled skein we weave.
that said:
I’m watching carefully.
The SECOND that they start charging interest from the time of purchase (as they do in other countries), or they add an annual fee then I’m dropping them like a hated ex.
If you are that worried about your FICO score then you are too dependent on credit. I didn’t even know what mine was until we bought our house, and it was fine. I have one credit card, and use it as little as possible. My wife uses hers more, and pays it off every month, but just had her rate raised anyway. I’m going to go back to not thinking about my FICO score. I’m for freeing yourself from the credit system as much as possible.
I do know that a lot of small businesses use credit cards for financing; I’ve done it myself, and I can’t say that I really recommend the practice. You can easily get in over your head that way.
Well, you can stretch that logic even more in saying: Hey, I should hold a (little) balance on each credit card for a month or two, then get rid of that balances again – it might improve your credit score because you cleanly paid back all your debts!
In my opinion a FICO should not keep you from doing the right thing: cancel at least half of your six cards, if you’re only paying a yearly fee on them.
I am one of those small business owners who are now forced into using credit cards as a means of running my business. Having BOA pull my line of credit last year (due to the nature of the current market not credit score change when things get better I can have this reviewed. Now BOA who I have all my business accounts with and have auto payment to all BOA related credit payments decided to increase my BOA business credit card 6.99% interest to 19.99% when I complained my $25,000.00 line of credit was pulled to just over my current carrying balance $5,000.00. Now I use my one and only credit card that didn’t raise my rate yet 9.99% to float my business, and hope they don’t come knocking for a rate increase. Let me explain how the market is for small businesses. Profit margins have been reduced in half from 18 months ago do to smaller pool of bids and customers available, payments for work completed is now on average about 45 to 60 days out and sometimes only partial in balance then another 30 to 60 days for the balance of payment, and then sometimes you have to go to court to get paid or have to put a lein on the property to get paid. I always pay my sub-contractors when they complete their work, I pay my vendors within my 30 day window, I pay my store rent every month, I pay my insurances every month, I pay for my advertising each month and then I if I have any left I pay myself, if not I have to borrow and I hope a check comes in the mail form another company that I have done work for who is doing what I am doing just to stay in business. Oh and I didn’t even get into the kickbacks and favors now required to win the bids.
Maybe the Congress, in its infinite wisdom, should have foreseen the fact that the banksters would quickly do as much as possible to raise rates before legislation reducing their capacity to do so went into effect. Maybe the Congress should have made sure that the legislation went into effect much earlier, like, immediately.
Could someone please explain to grandpa why the FICO score takes a hit if someone cancels a credit card? It doesn’t make sense and should be outlawed.
Consider the consumer. Just how much will he save now that his 401-K is down some 30% from where it was a year ago? Well, the data seems to say that the consumer will curtail additions to his indebtness; but, that’s not complete savings. That’s deleveraging.
The consumer will now consume to the level of disposable income. There will not be an amount set aside as savings. Why? Well, come all manner of storm, the dollar continues to loose purchasing power. That’s inflation by another name. But the pundits say we don’t have inflation, yet. But the consumer knows better. The current rate is about 3.25% compound. Given that, the rational choice is to pay with tomorrows dollars. The catch is to have a reliable income stream.
Consider the price of gold, the prices of most stocks, commodities and similar assets. They are all generally higher than they were last March. Cash that was extracted over the course of the stock market selloff is coming back into the market. The averages are going up on diminishing volume and the chartists are wild with visions of developing tops. That’s where the inflation is! It is a bubble that portends a second market collapse.
As to Credit cards. Pay the balance due in full when due. Use cash more often. For with small businesses that rely on short term credit that is drying up, get creative find a financial partner, shrink the business, go out of business, at last resort use the credit card; but, pay the balance due when due. What the banks are doing is there somewhat lame effort to ration credit. The consumer’s defense is not use credit.
When the next market collapse comes we get to see which banks are indeed solvent.
Grandpa Tony: A large chunk of your FICO is based upon your percentage of total credit used; i.e., they take your total card balances outstanding and divide that figure by the total amount of credit you have available.
Thus, when a credit line is cut or closed, your debt ratio — the “percentage of credit used” — increases. (Assuming outstanding balances stay the same.)
Higher debt ratio = lower FICO score.
The sooner one rids of one’s subservience to FICO, the sooner one gain one’s freedom.
Stop worrying about your FICO.
Ives, I notice you are signator to a “Letter To House Financial Services Committee” posted by Tyler Durden, cosigned by Naomi Klein and other favorite people at ZeroHedge.
Why isn’t it posted here? It’s a good letter. Still, I would have liked to see more flames and smoke billowing from it. Maybe it would set Ben’s hair on fire. Oh…not much fuel there.
The best thing I ever did was give up the credit cards.
the fico scoring last week was 800 and I haven’t had a card in 5 years.
I repeat the best thing I have done financially, it was absolutely liberating.
You can always buy a card and use that.
FICO score is a lot like grade of beef…it’s a measure of how tasty you are, to a bank.
AmEx raised our rate from 10.99% to 13.99% in January even though our balance was zero.