Credit Card Interest Rates Much Higher

The spread on credit card interest--the difference between the interest rate on your charges, and the Treasury benchmark rate--is the highest it's been in 22 years.  The culprit?  The CARD Act, which has given banks much less flexibility in the fees they charge.  Banks now have to give you 45 days notice before they raise your interest rate, and they need to give you the option of paying off the debt in order to avoid interest rate hikes.

This is entirely unsurprising; if you want a fixed interest rate (or the option to get a fixed interest rate), you're going to have to pay to offload the risk onto someone else.  If you want to avoid penalty fees (those are also now controlled), then you'll have to pay for that too.  Bank cards are an extremely competitive industry; it wasn't likely that banks were simply going to eat the losses.  If you'd added controls on the interest rate, they'd be dumping their riskiest customers.

That doesn't necessarily mean that the rules are bad; there's a plausible argument that the increased transparency is worth the higher interest rate.  As Carolyn Maloney says in the article, "Better that consumers should know up-front what the interest rate is, even if it's higher, than to be soaked on the back-end by tricks and hidden fees."

Of course, lots of people weren't being soaked on the back end by tricks and hidden fees; the people who pay their bills on time or even early. Those people are paying more, while folks who have temporary cash flow problems (or permanent forgetfullness) will pay somewhat less.  Whether or not you think this is fair depends on a set of moral judgements about indebtedness; do the timely bill payers deserve a bonus for living within their means, or do the bill-missers deserve some help because they're more likely to be hard up?

What's actually not clear to me is whether the people now paying more are, as a group, better off than the group that is now paying less.  The new interest rates are not going to hit the affluent folks who pay their bills off every month, any more than the old late fees did.  Instead, they're going to be hardest on people carrying a substantial balance--people who may have made the payments on time, but did not have the necessary scratch to pay the whole thing off.  Are people with large credit card balances less deserving than people who miss payments?  In some cases, they're the same group, of course--in which case, it's not clear to me whether the new rules are better or worse for them. 

But where the two groups do not overlap, I am not sure that the group we are rescuing from sudden interest rate changes and late fees is more needy than the group who is now paying higher interest rates to counterbalance the fees.    Indeed, the higher interest rates could conceivably tip some people into the "misses bills" group.