Back in October 2008, I mentioned that Wells Fargo had instituted a “fixed floor rate” on my lines of credit.
A few weeks ago (early 2009) USAA did the same thing. They raised my interest rate and said it would now be the lowest rate I would ever have.
The reason? The rising costs of credit cards.
On the surface, it looks like “costs” might mean: costs of labor, paper, postage, check processing, etc.
But I take a different view.
So many people are defaulting on their loans that credit card companies are having to raise interest rates on their BEST customers just to help stop the bleeding.
In other words, those customers who are still able to repay their debts are picking up the slack for those who can’t.
When everybody was still making payments, there was no need to create artificial floors for interest rates. So low-risk customers got lower rates and high-risk customers got high rates.
Now, it seems even low-risk customers are going to be paying higher rates.
This is the direction I feel the entire credit industry is moving in. As more people default, the costs of those defaults will be pushed onto the most financially stable (and able!) borrowers.
What do you think?
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{ 5 comments }
I think you’re right Ryan, but this is hardly a unique issue to the credit/debt industry.
This same problem applies to almost anything.
Good drivers pay higher insurance premiums because of bad drivers who cost the insurance companies more.
Even the price you pay at any supermarket, drug store, computer store or any other retail establishment has a certain amount of cost built in to cover shoplifting and other dishonest customers.
I guess that old saying “nice guys finish last” applies here.
I have to agree – there’s no such thing as a free lunch because somebody, somewhere is paying for it.
With the knowledge in mind of how easily the credit card industry can gorge their customers, I’ve chosen to make the credit card my highest priority by paying it in full every month. If it means a smaller student loan payment, then so it be. I refuse to pay their ridiculous rates – or to be paying for other people’s lunches.
@William – Excellent point. Car insurance is a good example; health insurance is even better.
In my old company, I was paying something around $250 a month, and the company was paying an additional $900 a month. So $1,150 total.
When I got my own insurance, I cut that considerably. I know pay $270 a month for my wife and kids. (I don’t carry health insurance.)
@Leah – I agree that it’s better to pay off credit cards first simply because they have so much freedom to jack up your interest rate, increase your minimum payments, etc.
Credit death is what its called. I have to share a little side story…does anyone know what “Mortgage” really means if you look up the term?
Grip of Death, Mort, and gage. Take a look.
@Tim – Excellent point. I knew of the meaning of mortgage. Same root as the word mortis in “rigor mortis.”
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