My APR just got increased by 270 percent

Yes, I live in a bubble unlike you who wanders the mean streets.

 

Not missing anything. I understand their business, bird. Honest. This is simple dollars and sense. They didn't mismanage their risk the way it gets portrayed the way you just did. They knew exactly what they were doing. They NEED those riskier customers -- in up economies -- because that is their most significant source of revenue. They have no business without those people.

Banks feasted on people with sketchier credit profiles to make their profits. It's not profitable to give someone a low prime-plus rate, no fees, a rewards program, allow them 30 days float and have them pay off in full. If that is the whole credit card business, there are no credit cards. That WAS about a third of borrowers. Those people were supported by people who paid fees and higher rates. It was great when the economy was in plus GDP territory, because defaults were managable and predictable. They had predictable write offs and they could pay for that third and then some on people who wanted credit, but had higher risk (and therefore higher rates) and kept balances that they regularly paid interest on. When the recession hit, they got hit with massive defaults. And the card companies started cutting credit lines, imposing fees and in order to make up the shortfall had to hit the third getting a "free ride," with higher rates, because they couldn't rely on the deadbeats (and the industry does refer to them as deadbeats) for their profits. That should be understandable for people.

The legislation was stupid beyond belief. What you saw with those higher rates was the industry reaching it's own equilibrium point. But the industry was demonized and now people are going to see the "fix" from politicians is much worse than what competition gave us.

We used to have a system that priced people based on their relative risk profile. Regulation has taken away their ability to do this. The last parts of that legislation are taking effect which is why people are seeing last minute changes by the industry to deal with it. Now we will go back to somewhere closer to the 1960s and 1970s when the credit card industry was nascent. Credit cards were reserved for only the best consumers (credit was not nearly as ubiquitous) and rates were fixed for everyone in the 20 percent range. That was because they were regulated, but at the state level then with usury laws that limited the issuers' ability to assign terms based on individual risk based on credit history.

The states relaxed those regulations in the late 80s and that is when we started to see the credit card industry as we know it. They began offering cards with different rates and fees and the pricing was tied to each cardholder's credit risk. It has been a boon to consumers and to our economy. Now Congress has screwed with that and there are going to be side effects that hurt consumers and hold the economy back. It sucks. And I wish people realized how this is what you get when you demonize industries like this and do draconian things that make no sense.

The relaxed regulation and the different rates for different people starting in the late 80s pushed rates down for many consumers, pushed them up for riskier cardholders and allowed issuers to offer credit to more people, because the riskier people actually became the most significant source of revenue and allowed card companies to give people who pay off in full or manage low rates a free ride.

We could still have that kind of industry, but now we have the government not allowing them to manage their risk on their own because how they manage their business is artificially being dictated. So it means everyone has to get treated like a potential risk and we'll be back to that 20 percent rates across the board and much tighter credit, with people who reflect any sort of risk unable to get credit. That is the way it has to be for them to earn a profit.

When you allow them to price risk and offer different terms to different customers, though, it's ridiculous to turn them into a boogyman when we have an economic downturn, and they are getting smacked with massive defaults and as a result they start dumping risky customers, lowering limits and hitting even people who were paying their balances with higher rates and fees. It isn't "screw people because we can." Has anyone here looked at how badly hit that industry got when the economy turned down and defaults skyrocketed? They targeted the guy with the 7 percent fixed rate and raised on him because they could no longer afford to give him a free ride that was supported by the bigger credit risk paying fees and carrying big balances at higher rates. OMany of those people have been defaulting.

*I* have been one of those people with good credit and I had one bank do something that pissed me off to the extent that they lost me as a customer for life. But I understand it. No one is forcing me to do business with them. I made my choice on my own. With government regulation,bthe terms are going to be worse for responsible people than they would have been. They took a situation where people with 7 percent rates who were getting a "free ride" where some of their risk was being paid for by people with higher rates and fees who needed to accept those higher rates because of their poor credit history and regulated them to the point where they can't structure their businesses that way. So now BT who had that 7 percent card finds his rates doubled, because HE has to be the source of revenue because rather than managing their risk and spreading it, they were being "predatory" or "evil." Thank Congress, BT.

 

D-3's question is a good one. I am not sure what to do anymore. The regulation has changed everything. You used to need to establish a good, long history of credit to keep your ability to secure credit for big things. Now? You are going to see way more cards that charge you $50 a year fee (the way it was in the 60s, 70s and 80s when states regulated the industry) and credit is going to be harder to secure. And with the regulations, your credit history is still important in getting you credit, but it has less to do with the terms you will get because everyone is going to get smacked with higher rates to help keep the industry profitable. My gut tells me that if you have cards that now have unfavorable terms, you should ignore the old advice and get rid of those cards. No use paying fees on a card you don't use. But I'd take a wait and see approach for a bit and see how things shake out first, maybe. You might regret giving up a card you have had for 20 years and have built up a credit limit on, only to find 3 years down the road that no issuer will deal with you anymore because your income isn't high enough, for example. That may be where we are headed (and even if it is, it will be the same card with an annual fee and a 20 percent rate).

 

The thing about a loan shark, Simon is that no one forces anyone to deal with one. And loan sharks break your legs when you don't pay.

Credit cards operated the same way for more than 20 years with terms dictated by individual credit risk. It allowed MORE people credit -- no one forced someone shaky to pay high rates to have a line of unsecured credit -- and the fees and interest those people paid created a great world for people who could afford to float a balance for 30 days, pay it off with no fees and even get rewards. It worked just fine for our economy and it worked pretty well for people.

Then we had a recession and the card companies did what they had to to stay in business. The riskier people start defaulting at high, unexpected rates of default, and the card companies looked to everyone else to make up the lost revenue--those people kept the business profitable when defaults were predictable and lower. It's SHOULD be understandable to people. You don't have to be happy about it to understand why it happens. But we turned them into a boogyman. Congressmen found a populist cause. And they actually found a way to turn that populism into legislation that makes things worse.

If you consider it loan sharking, I disgaree. But my suggestion if you really see it that way is to not deal with a loan shark. No one is forcing you.

 

Shorter UNTRUE version. Last year, Bank of America Corp. and J.P. Morgan Chase & Co. suffered combined net losses of $7.8 billion in their credit-card operations, and this year will be worse unless a miracle happens. Those are two of the three largest issuers in America. In 2008 when the recession first hit, Bank of America, JP Morgan Chase and Citigroup were on the hook for $46 billion of nearly $76 billion in unsecured credit in this country. Their businesses have NOT been profitable. They have suffered billions in losses on their credit card operations and what BT saw was the result of that, as I have pointed out in several posts. I'll discuss this with anyone, because it is interesting to me, but if you are going to post something at least factually have a clue what you're talking about, please.

 

Of course they were profitable. The idea of any enterprise is to make money. You just stated that cards are making 17 percent profit margins (as opposed to 28 percent before-- and I have no idea what profit margins were, but it's easy to figure out because these are public companies). In any case, you tell me that cards are making 17 percent profit margins when I know the industry has gotten slaughtered as a result of the recession and lost billions that have them teetering and it takes me two seconds to point out that what you said is patently false. 1) That industry has lost billions of dollars because of the recession and your statement was false and indicative of someone who is making up shit that isn't true.

 

There is no way to respond to that. The defaults are real. The losses for these companies have been in the billions of dollars -- on their loan businesses. My suggestion if you have proof of anything you just said is that you contact the SEC. These are all public companies that were already heavily regulated and have extensive disclosure reporting rules. If they are cooking the books, which I believe you just suggested, go Enron on them by all means. If not, that was just silly.