The Credit Card Burden

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

[Living4Dividends]

Credit card companies are getting by with a little help from their friends: Geithner & Co over at the Federal Reserve are bailing out Credit Card receivables under the TALF (Term Asset-Backed Securities Loan Facility)

2009 Oct 08 03:54 PM

[joe in miami]

The reason consumer credit is "down" is because credit companies are closing outstanding accounts and reducing credit lines. Think about it. Why would a consumer be motivated NOW to pay down their credit cards? That argument doesn't make sense. Are the unemployed suddenly paying down their credit cards?

Obama's Credit Card Reform Act resulted in credit companies jacking up rates on everyone; poor, middle class, affluent and wealthy. My private bank just increased the daily limit on debit cards. People are using debit because their "credit" cards are screwing them.

2009 Oct 08 04:59 PM

[Gary A]

I have advocated baby boomers walking away from their credit cards. Apparently they are walking away in DROVES. It is nice to see that the younger folks who moved in with their parents, are clean credit wise, while their parents are sacrificing for them and for the good of the country. Anything that hurts the biggest banks is good for the country.

2009 Oct 08 06:12 PM

[Moon Kil Woong]

It is unfortunate that although people are having to deal with the impacts of a recession and rising debt and defaults, banks and financial companies get a free ride on the almost 0% interest rate bandwagon the Federal Reserve is providing for them not to mention the backstops and Ferderal Reserve purchases of their bonds. They certainly aren't passing on the good low interest rate favors to anyone besides themselves.

If the Fed wants to do anything to help the economy and not themselves and their cabal of bankers they should precondition their assistance by requiring banks to actually loan the amount of money they buy or backstop or require them to stop using credit cards as a means to legalize usery. The credit card insustry is rife with bilking customers every way possible. Even 7-11 is suing credit card companies for ripping customers off in transactional fees.

Such poor behavior by financial companies only prolong the recessionary pain although it is clear they help pay for a lot of bad derivatives losses. Too bad that there is roughly $500 trillion more derivatives. If there is a collective 1% markoff on them, according to Felix's numbers, it will take roughtly 40 more years of credit card customer bilking to cover their losses.

2009 Oct 08 10:11 PM

[bbro]

Your lack of understanding of how our economy works is scary....


On Oct 08 06:12 PM Gary A wrote:

> I have advocated baby boomers walking away from their credit cards.
> Apparently they are walking away in DROVES. It is nice to see that
> the younger folks who moved in with their parents, are clean credit
> wise, while their parents are sacrificing for them and for the good
> of the country. Anything that hurts the biggest banks is good for
> the country.

2009 Oct 09 02:11 AM

[RATHER FISH]

TRUST what beautiful word. The banks/credit card companies have outfoxed themselfs. The droves will never TRUST the banks for a long long time. Ask a friend and listen to the war stories of their opinion of CREDIT CARD COMPANIES.

2009 Oct 09 09:43 AM

[Alan Young]

On Oct 08 06:12 PM Gary A wrote:

> Anything that hurts the biggest banks is good for
> the country.

I wonder how widespread this sentiment is, and what that means for the future of our society?

If it means that eventually the biggest banks will be forced to disaggregate themselves, then maybe it's a good thing.

We've been engaged in "class warfare" for 20-30 years now, but only one class has been armed. Some signs that the underdog might fight back is actually encouraging.

2009 Oct 09 11:56 AM

[Ricard]

Very nice explanation of increase earnings at CC companies.

2009 Oct 23 10:27 PM