High Interest Rates Only Work if You Hide Them

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.

Case in point: First Premiere Bank used to charge a 25% rate on a credit card, and made up another 50% plus with a raft of fees. After the CARD Act, First Premiere Bank tried charging 79.99% APR, instead. Consumers who got the card took one look at the bill, realized the obvious—that they would probably never pay it back—and defaulted.

However, First Premiere Bank did find out something valuable, the rate at which most consumers are willing to make payments. Here it is: 59.99%. So there you go, lenders. 59.99% is the highest you can set an interest rate and expect to be taken seriously.

(photo: http://www.flickr.com/photos/bluejake/819073761/)