Unintended Consequences: Credit Card Interest Rates now Much Higher | Hacker News Reader

Unintended Consequences: Credit Card Interest Rates now Much Higher

theatlantic.com

27 pointscwan58 comments

Credit card interest rates don't generally relate to default probabilities in a sane way, as Mike Konczal explains here: http://rortybomb.wordpress.com/2009/05/22/credit-card-reform...

There is no rational model that relates your credit card interest rate in a reasonable way to your own actions. If you send in a $5 payment two days late, that's often treated the same as sending in a $5000 payment one month late. But any sane bank officer will tell you that these two events are vastly different when it comes to default probabilities. Credit cards in the US are an insane debt instrument, and ideally, people would use them only for providing transactional credit and not for loans.

Its funny, given the wealth of data available to credit card providers, they have the ability to carefully fine tune rates to a decent estimate of loss probabilities. If that happened, you'd see rates smoothly transition along a curve in response to your actions rather than see-sawing between two or three rates. But pricing in default risk isn't the goal since defaults are great for credit card companies. The more you default, the more fees and interest they can tack on, and many borrowers will end up paying most of that back. It is so much more profitable to earn $5000 on a debt of $1000 after all, even if you have to wait 2 or 3 years to actually get it.

My card rate is -2% since I got 2% rebate on every purchase, 3%-5% for certain things like gas.

Which card is that? The best "cash-back" programs I could find only offer 1% on "every purchase".

Schwab is/was 2% on every purchase, deposited into a schwab account.

Costco Amex is 3% for gas and restaurants, 2% for "travel" (hotels, travel fare), and 1% everywhere else. (Anomaly - It's 1% inside theme parks, even for food, but 2% if you pay for things in advance.)

Discover runs 5% promotions on various things that last a month or two. These things include gas, grocery, drug store purchases. However, make sure that you understand the terms. (Some of the travel promotions weren't much good because 5% only applied to the first $500.)

Which card? I get nothing on mine :-(

This is pretty important - if you're not paying for everything with a rewards card, you're subsidizing those of us who do.

Yes, exactly. This is why rewards cards are ultimately so evil: they're based on a bastardization of an incentive structure that needs to die.

Rewards payouts are funded by interchange fees which are paid by the retailer... aka the consumer. If you use rewards cards, your rewards payment is subsidized by populations whom don't use rewards cards.

The whole reason interchange fees existed in the first place was to move some of the costs of operating the networks away from banks to merchants. Merchants have a natural incentive to accept cards (sales!), while banks originally didn't have the same incentive to offer them. Interchange fees were meant to level the field.

In a competitive environment, interchange fees should go down and reach an socially efficient level. Instead, the US has the highest interchange fees in the world due to network consolidation and the four-party system catering to banks, not to merchants.

IIRC, the average US household pays ~$400/yr in interchange fees. Rewards cards are silly and I'm glad they'll be dying a slow death soon.

American Express Blue Cash card is the best deal around IMO. No fees, and cash back for purchases. Each year I get a check from American Express for about $1 - 2k which is our cash rebate.

American Express can afford to give the best deal to consumers because they give merchants the worst deal. That is why so many merchants don't accept American Express.

Amazon.com accepts Amex. I practically buy everything there: Shoes, Aftershave, Books, etc.

The only time I have a hard time using it is in mom & pop shops. This isn't really an inconvenience to me.

Have you traveled through Europe lately?

No, but in Australia I routinely had my Visa and MC turned away along with my Amex. Who cares? I don't live in Europe or Australia.

I have the Schwab FIA card and the HSBC Orchard card which are 2% on every purchase. Amex is 3% on gas/travel/restaurant. Discover is 5% on gas/other-stuffs sometime.

Sometime there are promotion on Amex gift cards with 2% to 4% rebates. I would buy those with my Schwab card, getting effective 4% to 6% rebates. Edit: Funny story, I used this $3000 Amex gift card in Starbucks and the cashier said someone was really nice to you to give you that. I smiled. Yeah, I'm nice to myself.

Funny thing is, mine recently went down. Obama's bill has made it illegal for credit card companies to continue to penalize you with higher interest rates for a late payment made more that six months ago (as I understand it). I called my credit card co and told them they have no reason for having my interest rate at 28%+ when I made one late payment years ago over the life of my card (15 years or more?). They dropped my rate to 9.9% three minutes later. I highly recommend calling them and asking them why your rate is so high -- especially if you have a late payment in your past that is more than six months old. And, if you've made a late payment recently, put an alarm in your calendar to call them six months from now. This was an awesome thing the Obama admin did that can save americans millions of dollars, but does anyone appreciate it or take advantage of it?

I think you've missed the point of the article. The law prevents the CC companies from doing any statistical analysis to assess the higher costs to the greatest risks. That means that people who pose a lower default risk will have to pay just as much as those that pose a higher risk.

You might think it's great, but that's because somebody else is paying the cost of your default risk.

They are allowed to do statistical analysis using such factors as credit score and amount of debt. The difference is that now they can't increase your rate on existing balances. They can still raise your rates, but only if you want to borrow more from them and don't opt to pay off the balance at the previous rate.

This seems much more transparent to me - you are selling a fixed-rate bond, rather than borrowing at a rate subject to their whim.

You make a good point, but I don't think it's completely correct.

I think what you're missing is that the period of the loan from the CC is also open-ended. With a conventional loan, the lender knows that he'll be repaid (i.e., risk goes to 0) at the end of the term (30 year mortgage, 5 years for a car, etc.).

With the CC, the borrower may be holding those funds pretty much forever. This means that the lender is assuming more risk: first, that at some point way down the road the borrower will default; and second, that changes in the cost of capital make the CC "loan" unprofitable. This latter risk is much more acute today, precisely because interest rates are so low. If the CC rate is calculated to be profitable based on (e.g.) today's prime rate, then there's every possibility that 10 years down the road it's going to be a lousy deal for the CC company.

So as I said (but not for precisely my original reasons) you're putting more risk on the CC company. And the CC company has to recoup the costs of that risk somehow.

That is not true at all. Different cards offer different rates to different people. Shop around. This bill just forced the companies to move their revenue from hidden charges to the interest rate.

That is very different from the government forcing every card to charge every person the same rate.

I never claimed that it was forcing every card to charge every person the same rate.

My claim (and that of the OP) is that it decreases the ability of the CC company to differentiate. They can still do so, but to a much lesser degree.

So they can have different rates, but there will be fewer of them: it forces them to quantize, and put people with different circumstances into the same bucket.

Who cares? I wouldn't care if my credit card interest rate was %100. I always pay it off in its entirety every month. I will never carry a balance, and thus never accrue interest, unless there's a real emergency. If there's a real emergency, the amount of money it costs is not really a concern, the emergency is. That's what makes it an emergency, it's more important than money.

A credit card to me is just a convenient way to buy things online and in person without having to deal with cash. IMHO, if you ever carry a balance in a non-emergency situation, you're part of the problem, and you deserve to pay that higher interest rate.

Don't buy things you can not afford.

Don't buy things you can not afford.

This is a fine rule to aim for (prudent for individuals and all that), but it makes me wonder. If everyone in the world (and the nations of the world) actually began to live by this advice, wouldn't that trigger an immense depression? (When responding, please take me at my word: I'm not consciously posting flame-bait; I'm just truly ignorant when it comes to economics.)

An increase in the savings rate has significantly negative effects on GDP growth in the short-term. So, if the US suddenly lived within its means, it would cause/worsen a short-term depression.

In the long-run, a bigger capital base can create more technology and/or capital investment, which improves productivity, which improves standards of living.

I agree with your conclusion, but part of your logic is faulty. You seem to be assuming that all savings takes the form of holding debt from others, e.g., bonds. But that's only one possibility. You can also save by owning equity in others, e.g., stocks.

However, I don't want somebody else to own equity in my house, rather me having a normal mortgage.

At the very least, such a change would cause all kinds of liquidity problems, and would certainly cause the significant negative effects you predict.

I'm no expert, but I've always understood that to be basically true - that our entire system depends on debt because debt is how money is created and our system depends on that process in order to avoid falling over itself. It's part of the magic of fiat money, I believe. If our money was based on a physical good (say, gold), then I don't think the same rules apply.

Edit: I'm doing my part in aiding the collapse of civilization by not carrying any debt. (Except for my house - but I wish I didn't even have that one hanging over my head.)

If you talk to people who come from Asian countries, you'll find a completely different set of values as far as spending is concerned. Yes - I did NOT use to buy things I couldn't afford. I lived by saving and waiting to buy. This is how even the US was officially before 1940-50, but practically even as early as 1980s.

Where I come from (India), a decade ago, you could find people who had waited all there lives to use there savings to buying a new home. There was no concept of 30year mortgages - forget about credit cards. When credit cards were first introduced, they were used for the convenience of not having to carry cash not really for credit (at least from the customers point of view). But things are changing now - its becoming the same as in the US.

Don't buy things you can not afford.

So if you don't have $200k on hand, you shouldn't buy a house?

(or is the rule "don't buy things Apreche doesn't approve of you buying"?)

A house is partially consumption and partially investment. If you can't afford the consumption part (mortgage/tax/upkeep payments minus the equivalent rent), then you shouldn't buy it.

Don't buy things you can not afford

While true, in the way you use it, it's a gross oversimplification. e.g., I can afford my house but there is no way I could pay cash for it and I'm simply not going to save for 20 years to do so.

In short: just because you need credit to buy something doesn't mean you can't afford it. On a site purportedly aimed at entrepreneurs, it's disheartening to see how many people really don't understand the usefulness of properly managed debt.

The end result of this regulation will be more transparency in borrowing costs, and nothing more. From a pure economics point of view, it doesn't make sense that the overall cost of having/using a credit card will be any higher for any given class of risk since this regulation doesn't affect the overall risk of lending to any given credit class. Competition ensures this.

In other words, people in the credit class of FICO 800 or better should not see any additional increase in their interest rate, while less credit-worthy people who in the past were charged more hidden fees, will see an increase in interest rate to recoup the lost revenue needed to justify lending at that class of risk.

If there is currently an overall upward trend in the cost of having/using a credit card, this would be attributable to something entirely different, say a smaller overall pool of lendable capital due to a weaker economy, or maybe a regulatory change that did impact the risk of lending, bankruptcy reform for example...

My card rate is and always has been 0 and it's the way it should be.

Don't worry, you're still paying for it.

This isn't obvious, but it's true.

I pay off my cards every month (my wife is a fantastic money manager), so I don't pay credit card interest. But that's only the surface.

Retailers have to pay to the CC companies a fee (it varies by card type, your processor, and what level of detail you provide to the company), something on the order of 2.5%. Even if you pay 0% interest on your card, you're still paying higher prices at retail in order to cover those card fees.

I have a card that gives me 1% back. I wonder if that's enough to overcome the higher prices due to the card fee. I guess that depends on how many people are paying cash or PO, and my guess is that for most retailers that's a minority, so I'm probably paying more even in this case.

Try asking for a cash discount when buying things. A lot of establishments will do this, just to avoid the credit card fees.

At least a few years ago this was against their contract with the CC companies (which isn't to say people won't do it under the table, they'll just be quiet about it).

I don't think this is true. They're not allowed to tack on a CC surcharge, but a cash discount (while accomplishing the same thing) is OK.

I didn't believe that cash discounts were OK, so I googled it and found http://fso.cpasitesolutions.com/premium/le/06_le_ic/fg/fg-me... which verifies that you're right.

Huh, you are in fact correct. I had stored in my brain the intended effect of the agreement but not the actuality.

Merchants pay higher fees on rewards cards.

Of course even though you pay nothing for your card and get a cash rebate you also receive a service from your credit card company in the form of hassle free returns and dispute resolution. This is, IMO, worth the nominal carry over effect that it might have on retail prices.

As is mine. Why waste money on interest? If you don't have enough to pay for a thing, you shouldn't buy the thing.

I agree with you, and I think it's because we spend our money on technology. When you buy the latest gadget immediately, it just becomes obsolete. When you save up to buy the latest gadget, a better one comes out before you're done saving. So you get a better a gadget and have more money for more gadgets.

I guess a lot of people want to have the "latest and greatest" for fashion reasons, and credit cards are appealing for that reason. I did that in college and it took me like a year of having a real job to pay it off. Sadly, other people never do pay it off.

Obligatory warning: Megan McArdle has a long and well-documented history of playing somewhat loosely with her facts in order to make political points. Bear that in mind when considering arguments she makes.

I think that in making an ad hominem argument like that, you ought to at least provide documentation rather than just sling accusations.

In my experience, her reasoning has been sound and I'm not aware of a high degree of factual errors in her writings.

If you're right, please help us understand. Otherwise you sound like a partisan yourself.

I've posted an example in response to one of the other comments. In the future I'd appreciate it if you'd refrain from conflating source criticism with ad hominem attacks; someone who has, in the past, been demonstrated to misrepresent or misreport facts in service to political goals is an unreliable source, and there's no fallacy in pointing this out.

I'd appreciate it if you'd refrain from conflating source criticism with ad hominem attacks

I only conflate them because a criticism of the source (as opposed to a criticism of the argument, or objection to a fact) is an ad hominem attack.

See wikipedia: https://secure.wikimedia.org/wikipedia/en/wiki/Ad_hominem

An ad hominem, also known as argumentum ad hominem (Latin: "to the man"), is an attempt to link the validity of a premise to a characteristic or belief of the person advocating the premise.

You cite an (alleged) characteristic of Ms. McArdle, that she's had factual errors in the past. You have not even mentioned the facts of this article: your argument is based on that characteristic of Ms. McArdle. QED

An ad hominem attack is, or is usually understood to be, fallacious and as such an invalid point. But bringing up a past record of unreliability in a given source is neither fallacious nor invalid; it is in fact extremely relevant when considering how carefully to examine claims made or how thoroughly to check sources cited.

In other words: "this person has been known in the past to misrepresent/misreport things" is perfectly valid to point out, as such a source should be taken with a grain of salt and subjected to scrutiny. Megan McArdle is one such source.

I went back and looked at your original post. You said Bear that in mind when considering arguments she makes.

Based on this, I think I may have been a little harsh. You didn't cite specifics in her history, nor did you make specific objection to the argument or facts of the OP. However, you also didn't explicitly say they're wrong; you advised vigilance. As there's nothing wrong with that, I now think I owe you some apology.

That said, I still believe that you came across like a partisan mudslinger. And I stand by my claim that an effort to defeat an argument by addressing its author rather than its argument or facts, is by definition an ad hominem attack.

If you go read the OP, you'll find that it's really an exercise in balance. There's not much factual in it, nor does there need to be. Nor does she really come out on one side of the argument or the other. All she's saying is that the situation isn't as simple as "the government identified a problem and fixed it for us", and I think she makes that point well.

But it's very difficult to argue against reasoning if you don't believe the facts they are derived from. If you don't have time to do the research yourself, you tend to trust past behavior. She's been caught manipulating facts to support her point-of-view -- so, I can't accept her "givens" without research. I think pointing out that someone has been documented doing this in the past is enough to warrant not accepting the premise until verified.

There are many, but this one is lengthy

http://www.salon.com/news/opinion/glenn_greenwald/2009/01/22...

and another

http://tbogg.firedoglake.com/2010/07/25/megan-mcardle-is-jus...

It's not her reasoning -- usually it's her "facts".

Can we get a new Internet-Meme-Law like Godwin's, to say the moment anyone invokes ad hominem without specifying what the personal insult was, they automatically lose the argument?

Megan McArdle has a long and well-documented history of playing somewhat loosely with her facts in order to make political points

Do you have any citations for / examples of this? I ask because she's a) pretty scrupulous IME and b) is very good about making "mea cuplas" when she's not.

Here's one example of a McArdle debunking:

http://inversesquare.wordpress.com/2010/07/24/why-friends-do...

Many more are lurking around the internet, should you feel inclined to dig them up.

I found that criticism less than persuasive. If a person says that $1000 in medical bills is to low a threshold to declare a bankruptcy to be due to medical expenses, then the fact that the actual threshold the study used was even lower ($1000 in medical bills or A or B or C) doesn't detract from the argument and merely makes the critic look bad.

All the other specific criticisms seem to be either equally pedantic, or matters where there could be a reasonable difference of opinion expect for his proper criticism of her for getting the response rate of the survey wrong which does significantly effect one of the points Megan raised in the article that was being debunked.

That particular example, though, is a strong one. McArdle wrote: "Warren and her co-authors defined anyone with $1000 worth of medical bills as having a medical bankruptcy". In fact, the paper used multiple criteria, one of which was $1000 in uncovered medical bills. This is not a pedantic difference, so far as I can see; there's a big difference between having $1000 in bills, some of which is covered, and $1000 in bills, none of which is covered.

McArdle didn't distinguish between covered and uncovered bills in her writing, and given the context (covered bills can't push someone into bankruptcy by definition) it was pretty clear she meant uncovered bills. So yes, the author is being pedantic for insisting that something that was clear from context be spelled out.

Silly article when CC co's last year raised the majority of card holders rates to 29.99% unless they chose to "cancel" that card, locking in the previous rate. Much of the hikes were done even to those with no "cause." Meaning, a missed / late payment, recent foreclosure, etc.

I also called and asked my CC companies why they were continuing to raise my rates..late payment that year = rate hike of 10%.

Thank God all my CCs are already jacked all the way up to 28% interest rates, so they can't ass fuck me anymore than I already am being ass fucked. (Before the Republican Randroid's come out of the wood work to tell me it's my own fault—it is, I know, but like a lot of Americans, in the past couple years we've had no choice but to use CC's for necessary living expenses.)

My top goal right now is to live cheap, pay off all debt, and never again take on any debt. Ever. Debt is a fool's game, like any well-designed casino, "the house always wins." Hopefully an enormous number of Americans will learn this lesson and do likewise, and utterly punish the banks where it counts—on their bottom line. It wasn't too long ago that American's were amongst the most frugal and biggest savers in the world, which laid the foundation for a great cultural-Puritan work ethic.

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