Credit Card Companies Jack Up Rates Despite Flagging Economy, Super Low Funding Costs
The banks giveth and the banks taketh away, big time.
Even though banks are getting all kinds of bennies from the Fed and regulators, such as a nice steep yield curve and lots of regulatory forbearance (econ-speak for extend and pretend), they are still out to extract a pound of flesh from the retail borrower. Since that has been a core element of their business model for the last decade, it is probably not so surprising that they are loath to give that practice up.
Now some will argue, correctly, that consumers need to delever. But guess what? They are paring debt levels, including credit cards. The number of open accounts has fallen by over 20% since the peak, as has the balance outstanding (over 6%). And not all of this has been voluntary. Banks have been shutting accounts and cutting credit lines.
But (drumroll) increasing interest rates, particularly when the banks are getting very sizeable subsidies, means that more of the money consumers pay to credit card companies goes to interest, less to reducing principal (of course, the banks will maintain that they are merely recouping lost income from penalties, since new credit card rules have curbed abusive practices).
A more serious issue is that not all consumer debt is consumer debt. Credit cards have long been an important source of funding for small businesses. Generally speaking, banks will lend only to relatively large, established “small” businesses, or against assets. For instance, Amar Bhide, in his landmark book on new venture, found that the biggest sources of funding for new enterprises were savings, friends and family, and credit cards. Small business owners often use credit cards to contend with temporary cash flow shortfalls or seasonal borrowing needs. And I’ve known some who have maxed out their credit cards to save their companies. more