Saturday, October 24, 2009

Unintended Consequences

Congress just passed a law regulating credit card fees and rates and, on the face of it at least, protecting consumers. Much of the law goes into effect in February of next year, but part of it becomes effective in the next few weeks. One of the notable changes is that credit card companies may not raise the interest rate on an existing balance.

Citibank just issued notices, as far as anyone can determine it was to all of its card holders, that its interest rate is being raised to 29.99% on existing balances. That’s on all balances, not just ones that are delinquent. Actually, it’s Prime Rate plus 26.74%, which adds to a current rate of 29.99%. If the prime rate changes…

That's why "on the face of it" as to consumer protection. The law doesn't preclude 30% interest rates, doesn't preclude deceptively adjustable rates tied to prime, and didn't preclude massive rate increases to anticipate inception of the law's few restrictions.

Some financial writers are attaching all sorts of dire implications to Citi's move, but I’m siding with those who merely say that it is their decision to beat the new law; to get the higher rate imposed before the law prevents them from doing so. In addition to the consequences for cardholders, there are some unfortunate implications for the overall economy in that move.

Citibank has 92 million cards with $102 billion outstanding balance. The average interest rate charged was 12% on that balance, and raising it increases the monthly payments that cardholders are required to make, increases the interest they owe, and increases their overall debt. My financial calculation is a bit iffy, but I make that an increase in consumer debt, or payment toward debt, of $1.5 billion per month. That is just one credit card company, and not even the largest one.

That means sucking another $1.5 billion per month out of the consumer economy into the financial economy. Another $1.5 billion per month out of Main Street into Wall Street.

How is that going to affect consumer spending and economic recovery?

1 comment:

  1. Juniper does the same thing, although I admit I was 2 days late on a payment. I always pay way more than the minimum, but was just late a couple of months ago. Now the interest rate is over 22 percent. Talked to a rep who would not lower it for any reason. I therefore cancelled the card. Nothing is surprising about Citibank. They are know to be the most infamous of predators.