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!)
According to a report from Safe Credit Card Project:
“Citi is repricing a group of customers.” Credit card holders livid about ‘rate-jacking’ | CNN
Even though the interest rates banks pay are dropping, credit card interest rates are holding steady. Joseph Ridout of Consumer Action thinks the banks are trying to make up for their losses on subprime mortgages.
At the same time, banks are cracking down on existing customers by raising rates, dropping limits, and taking other draconian measures.
But if banks keep squeezing consumers with high credit card interest rates, they will see default rates skyrocket as people stop making payments they cannot afford, sending the credit card market down the drain right behind the subprime market.
Credit Slips, and NACA general counsel Ira Rheingold point out that Senator Tim Johnson of South Dakota wants to roll back the recent legislation limiting interest rates on loans to service members. This was a landmark piece of legislation, although we would rather see it applied to the entire lending industry. Who really needs more than 36% interest, anyway?
Apparently, Senator Johnson thinks that the law “may have a lot of unintended consequences that will go far beyond just the payday industry” and says that “[w]e are going to have to revisit that issue and make sure that the end result of this legislation isn’t to deny military members and their families access to banking services that they’ve always assumed would be there.” Somehow that just doesn’t square.
Here’s what we think is going on. Under federal law, the interest rates a lender may charge are governed by the laws of the state in which the lender is incorporated. Take a look at the information for your credit card when you get a chance. There is a 100% chance (well, maybe there’s a rogue, but I don’t see how they would stay in business) your credit card company is incorporated in either Delaware or South Dakota. Your payday lender? Same thing.
Wonder why that is? Guess which states have no usury law. Yup. Delaware and South Dakota.
Wait, where was Senator Johnson from again? Oh yeah, South Dakota. It all makes sense now.
Just goes to show you, it doesn’t matter who is in Congress; few politicians are on the side of consumers.
Article no longer available at CreditSlips.org.