Interest Rates Rising…
By Ryan Healy | October 13, 2008
In an economic collapse, such as the one we’re witnessing now, one thing leads to another. It’s like a giant row of dominoes. After the first domino falls, each one after it tips over in an inevitable chain reaction.
According to Jessica Silver-Greenberg, the next domino to fall is credit card debt. In her BusinessWeek article entitled The Next Meltdown: Credit-Card Debt, she writes:
Now regulators and politicians are trying to curb some of the industry’s abusive practices by limiting interest rate hikes, abolishing certain fees, and cracking down on questionable billing practices. Under rules proposed by the Federal Reserve, a borrower would have a 21-day grace period before being hit with a late fee, instead of the few days offered by some firms now. A similar plan working its way through Congress would allow banks to increase rates only on consumers’ future purchases — not existing balances. And under both proposals, credit-card companies would have to allocate account holders’ payments equally to balances with different interest rates. Currently, firms first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt.
If this sounds like good news, it is. Finally, some of the most despicable practices in the credit card industry may be banned.
The catch? These new laws will probably not be voted on until early 2009.
So, in the mean time, credit card companies are determined to do their worst. Given the possibility they may be prohibited from raising interest rates on existing balances, they are raising interest rates on existing balances NOW.
This may explain why Wells Fargo recently installed a “Fixed Floor Rate” on my lines of credit — even though I’m an excellent customer.
And if you’ve already seen your interest rates rise — or you see them rise during the next three months — now you know why. Credit card companies are trying to lock-in as high an interest rate as they can get away with BEFORE the new laws pass that prevent them from raising rates on existing balances.
…Which Will Only Accelerate the Collapse
Answer this: What will happen when credit card companies jack up interest rates across the board and put more pressure on cash-strapped Americans?
You can answer this question with three words: Default. Default. Default.
It doesn’t take a genius to see that credit card companies, in their greed, could force hundreds of thousands of Americans into default — and a chronic inability to pay minimum payments.
So while the new laws may ultimately be a good thing in the long run, they will unintentionally cause debtors additional hardship in the short-term.
And this unintended hardship will ALSO put even more strain on our weak economy. It will be interesting to see how everything shakes out.
Your Homework: Are you carrying a small balance on a major credit card? Pay it off as quickly as possible before your interest rate rises.
- My post Outstanding Debt as of September 2008 was just featured in the 161st Carnival of Debt Reduction hosted at Gather Little by Little.
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Topics: Credit Cards, Debt, Economics | 1 Comment »
One Response to “Interest Rates Rising…”
Comments
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October 15th, 2008 at 10:28 pm
hey drf,
thanks for the analysis and 411 — this is interesting.
thank goodness i’m in the process of sending a balance transfer over to a cc with 0% interest for 6 billing cycles — this will motivate me to ensure i get this thing paid off, lest i get slapped with some sky-high rate next year!