Kerr: Interest rates only a mobster could love

I have two credit card accounts and for the most part I pay them off whenever they’re due. I would like to think I am a good risk. I pay my bills, have very little in terms of debt, make a decent salary, and oh yes, always put some money in the bank. It’s the model of middle class responsibility. So, I was surprised when I got a letter from the Bank of America.

They decided that based on my credit history that my Visa credit limit needed to be lowered. Since I can’t think of when I have ever charged near the amount of the new limit, let alone the old one, I wasn’t that distressed. But, I was annoyed. I am a good customer, have been for years, and while they didn’t begin the letter with “Dear Deadbeat” I can’t say I appreciated it.

At that point, in something of petulant huff, I decided to study my bill in more depth. That’s when I got the big surprise. I know credit interest rates are high. That’s one of the reasons I try to never keep a balance. However, I had no idea how high the interest rate had gone. The new rate, for any outstanding balance, which fortunately I didn’t have, was a staggering 33.89 percent. I don’t think that even the Mafia charges that much for a loan, but not having any contacts in the Mob, I can only guess.

Apparently my experience with a credit card company isn’t all that different from what other people in our area are experiencing. The banks are facing a sea of bad loans and this has prompted them to take a new look at their credit card accounts. They want to limit their exposure and at the same time get as much out of their paying accounts as they possibly can. This means lowering credit limits and upping interest rates. However, once again, in yet another public relations disaster for the financial industry they carried it too far.

When it comes to credit limits the banks want to make sure that customers don’t carry more debt than they can service. This, after years of easy credit and letting almost anyone open an account, represents a new approach for these guys, but at least it makes sense. One mechanism for determining a credit limit is past usage. If you are always borrowing to the limit this is a cause for concern. Also, so are customers who pay off their accounts and don’t keep a balance. The credit card companies figure that extending a big limit to these customers it represents an unnecessary exposure. To some extent, that all makes sense. However, other practices leave a bit to be desired. For instance, if you shop at stores where the customers have a high default rate, then that too is a prompt to lower your credit limit. Since I make it a practice, being a good Scotsman, to shop at discount stores whenever I can, Big Lots being one of my favorites, this probably has had an effect on my account.

At the same time, the banks and credit card companies need cash. They’re losing money hand over fist so they’ve turned to credit card borrowers for an additional source of revenue. The rules on this are lax and all they have to do is increase the rates. It’s all legal, but responsible borrowers don’t like the idea of suddenly being told that their interest rates have doubled or worse. What’s more, in most cases, no one ever told them their rates were going up in the first place.

For many, this sudden increase in interest rates is nothing more than an organized effort to gouge the consumer. This would be bad enough, but many of these banks are still receiving billions of dollars in federal aid and it just doesn’t sit well. The president even had the CEOs of the major credit card companies in for a chat at the White House. He made it clear, and this has strong Republican support, that he was supporting legislation to require them to notify customers before they change the terms of their credit card account. If they raise interest rates or change a limit, they have to notify you ahead of time. That’s encouraging, but unfortunately, it’s unlikely that there are going to be any caps on interest rates. So, perhaps the best advice is to do your best to make your payments on time, and if you can, pay off the debt as much as possible. There is no need giving these guys any more business than they already have.

David S. Kerr is a former member of the Stafford County School Board. Reach him at info@staffordcountysun.com.