In the wake of the CARD Act, credit card interest rates are rising. This should not be a surprise, since the CARD Act forces lenders to put the true cost of a credit card front-and-center. Credit card issuers cannot advertise a low rate and then use fees to jack up the true cost of the card.
By forcing this sort of honesty, the CARD Act has exposed a secret: high interest rates aren’t the result of the market. If consumers know that a card has an interest rate of, say, 79.99%, they won’t pay it.
A commenter alerted me to the fact that the article linked below has been changed, apparently because the story was fake.
On a radio interview this week, Dolly Parton took Senator Bob Corker (R-Tenn.) to task over his opposition to a bill that would lower the interest rate payday lenders may charge from 400% to 36%:
For a dad and a mom trying to raise some kids on a military paycheck, a 400 percent interest rate is not just dumb, it’s un-American.
Dolly Parton gets it.
Dolly Parton Takes On a U.S. Senator | The Boot (thanks, Donna!)
Payday loans are small, short-term, high-interest loans. Most are less than $400, with a term of two weeks or less. In exchange, the consumer generally pays $15 for every $100 borrowed, or a 360% APR. (Even high-interest credit cards generally charge less than 30% APR.)
Most consumers roll over the loan several times, incurring an additional fee each time. For example, a $300 payday loan rolled over for three months will cost an additional $270 in interest payments.
So why do people use payday loans?
Possibly because there are few alternative for payday loan customers, if any. This is true, although some credit unions have found ways to lend to the same clientele at more reasonable rates. Still, as long as payday loans remain legal and the market fails to provide a widely-available, viable alternative, it looks like consumers will continue to use them.
(photo: slideshow bob)
If this happens to you, with Capital One or any other card provider, at least one Kiplinger reader has had some luck getting his rates dialed back. CapOne may not be willing, but it is worth a try.
Extra: Credit Card interest rates skyrocket | KARE 11
There are two bills (HF0914 & HF1471) pending in the Minnesota legislature. HF0914 would eliminate payday loans entirely. HF1471 would impose some regulations on payday lenders and adds a private right of action for consumers, with attorney fees and costs.
Minnesota Public Radio has more on why payday lending is under scrutiny and at risk of becoming outlawed in Minnesota:
Boy I hope this is a typo. Click for the actual, redacted statement.