Credit cards respond to new restrictions

Credit cards


BOB MOON: New rules on your credit card have kicked in. Banks will no longer be able to charge you an "inactivity fee"
when you don't use your card. There are also new limits on late fees. The restrictions started yesterday. And it sounds like great news for credit card users, except for one thing.

Marketplace's Amy Scott reports.

AMY SCOTT: Credit card companies have responded to all the new restrictions by pushing up interest rates. According to the Wall Street Journal, the average rate you'll pay on existing cards reached 14.7 percent in the second quarter of the year. That's more than 11 percentage points higher than the so-called prime rate that banks use to set other interest rates. The biggest gap in at least 22 years. And of course, the higher the interest, the higher your monthly payments.

Greg McBride with Bankrate.com says the rules have made it harder for credit card issuers to raise rates when borrowers fall behind. So they're setting higher rates from the get-go.

GREG MCBRIDE: They have lost the ability to reprice for risk on the fly. Instead, they're having to price for that risk on the front end and for everybody. That means lower credit limits, higher interest rates, and higher fees than we've seen in recent years.

All this, while rates on a typical home mortgage are at record lows. McBride says the message for credit card users is to pay down that debt. When the economy improves, he says, key interest rates will rise. And that will just push credit card rates even higher.

I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.
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There are a couple of questions that Congress, the SEC, the Fed, or some agency need to examine. They are:

When the Fed Funds rate is zero to .25%, and Prime rate is around 3%, at what point does high interest rates charged on revolving charge accounts become usurious?

2) Should bank writedowns on losses from credit cards that were issued by banks without proof of income by the card holder, be allowed to be taken as a deduction against income (as punishment for imprudent bank behavior) and/or not be allowed to be used as a factor in seeking increases in interest rates? Too often banks were giving out credit cards to folks who did not have the income or credit record to support using such a card, as if they were candy. Then, the banks cried when many people filed for bankruptcy or could not pay off the bills they had run up; losses on money loaned that never should have been loaned by a prudent lender. How much burden should the banks have to bear that do not devolve down to the responsible card holders?

"When the economy improves, ...key in-terest rates will rise. And that will
just push credit card rates even higher."
I don't know much about money, obviously, but doesn't that point argue for taking on [credit card]debt now, if you must, and paying it back in conditions of higher interest rates and an inproved economy (i.e.: an inflationary period)?

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