Credit Card Interest Rates

I was reading on Digg.com today and I came across an article someone titled "Senate Refuses to cap credit card interest rates at 15%" The talkback on both digg and the article itself are kind of amazing to me. It seems that people don't understand why a company is in business and why anyone would ever lend their money to someone else.

So first, let's try to understand why a business would lend money to someone. The only reason I can think of is to make a profit, otherwise their money is better allocated to something else that can increase profits. Business's exist to make money. Period.

If a business exists to make money, and that business want's to turn a profit by lending their money out, the set rates of interest based on a persons probability of paying said money back. For example, I have a relatively high credit score, it's not amazing by any means, but I have a proven record of making payments on time and being responsible with my finances. Because of this record interest rates that have been offered to me are low, around 10% for most of my credit cards. The banks can afford to give me that rate because I have a good history of paying that money back, and so I am a low risk.

Someone that doesn't have a good history of paying their debts on the other hand, isn't going to get the same interest rate as me. If for example someone misses a payment, or is consistently late in paying their obligations, the bank takes on a higher amount of risk if it is going to lend that person money. Therefore the bank should charge a higher amount of interest to cover possible losses if that person ends up not making their payments. In some cases I don't see there being a big problem charging 35% (which is the limit in most states on credit card rates) to someone if they want to borrow money.

We have to remember that borrowing money is not a right, it is a privilege awarded to those who will probably be able to pay back that money. Especially on unsecured debt, like a credit card.

While I don't have a problem with credit card companies charging high interest rates to people who seem to be a higher risk, I can see why some people might be disturbed when a credit card company wants to charge him a higher rate for seemingly no reason.

For example, in early 2007 I received a letter from Chase Bank about a credit card I had. I had a balance on this card and was working to pay it down. The letter stated that my interest rate was going to be changed to more than 30%, but to call the company if I had a problem with that. So I called the company to see what was going on because I had never missed a payment or had a late payment on any of my credit cards. I was told that because I had gotten near the limit on one of my other cards they were raising my rate and there was nothing I could do about it but cancel the card. So do you know what I did? I canceled that card and transferred the balance to another company. That was my right as a consumer, just like it was the banks right to increase the interest rate because it felt I was more of a risk.

As a people, Americans need to start thinking more about being responsible and having consequences to our actions and less as victims. Sure there are victims out there, but most people make choices and then play the victim when their choices bring about consequences that are other than ideal.

The credit card market is very competitive and if people are responsible and pay their bills on time and do what it takes to be seen as a good risk for a bank, they will never pay high interest, and if a bank wants to raise their rate, they can find another bank with more attractive rates somewhere else.

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Image from Andres Rueda on flicker at http://www.flickr.com/photos/andresrueda/3027534098/