Why don't credit card companies cut their interest rates?

the_big_al

normanmark wrote: »

The interest is where they make the money, so i don't see how taking payments would mean they would be more profitable. All that does is mean they have payments coming in, not making money. Speculating to accumulate. There's a small percentage of people who claim bankruptcy in comparison to a lot of customers who have a balance but not paying it off in full every month.

If a mortgage provider reduces his interest rate because of a base rate change (which is usual) it doesn't mean he stops making money and the same is so of credit card companies. I think the numbers of people who will default and stop paying altogether on their credit card bills will grow very considerably in this financial environment. If they cut rates it may allow people to continue paying rather than defaulting. I guess in financial terms it really boils down to whether the interest rate cuts amount to more than the money they'll lose from the defaults. Was it defaults on sub-prime mortgages in the US which initiated the latest crisis, I'm not sure.

lisyloo

I'm not quite sure who the less profitable companies are who you mention

If they followed your proposal then they will be less profitable because interest rates would be lower.

my thoughts were that the credit card companies would become more profitable by carrying on taking payments because of the reduced interest rates rather than losing business altogether from someone who may, for instance, go bankrupt.

A small proportion will go bankrupt.
This is offset against charging high rates to the majority.
I personally doubt that many will go bankrupt because interest rates weren't lowered 0.5%.

So same as normanmark says.

I'm sure they have people employed to work out this kind of stuff who probably are better at it than me and you i.e. they have to work out the risk in keeping it high versus the reward.

I understand your sentiment to help people out, but there are a lot of hardworking tax payers out there who are sick to the back teeth of helping less hardworking people out who've got into debt through their own fault.

I advocate people taking responsibility for their actions and if that means a few people being being repossesed then so be it.
I'm not saying I'm wishing it on anybody, I would never do that, but it's unfair to make hardworking savers and investors pay for the mistakes of people who have made poor decisions.
Anyway they have a way out and it's called bankruptcy.
It's not great, but ultimately there is a way out where people can start over.

YorkshireBoy

the_big_al wrote: »

If a mortgage provider reduces his interest rate because of a base rate change (which is usual) it doesn't mean he stops making money and the same is so of credit card companies.

You're forgetting (or don't know) that mortgage debt is 'secured' debt, ie default and the lender gets his money back through repossession.

Credit cards are 'unsecured' debt, ie you default and the lender gets a pittance back.

As a previous poster said, it's simply a case of risk vs reward.

the_big_al

YorkshireBoy wrote: »

You're forgetting (or don't know) that mortgage debt is 'secured' debt, ie default and the lender gets his money back through repossession.

Credit cards are 'unsecured' debt, ie you default and the lender gets a pittance back.

As a previous poster said, it's simply a case of risk vs reward.

No I wasn't forgetting and did know about secured/unsecured debt but I'm not sure what that's got to do with any point I've made. It's very possible and often happens that companies can drop interest rates and make more profits, a lot depends on the price of money in the markets.

YorkshireBoy

the_big_al wrote: »

...I'm not sure what that's got to do with any point I've made.

Let's try a different angle then.

The rate that a lender can borrow funds at (LIBOR or whatever) is not the only criterion for rate setting for credit card customers.

If a borrower maxes out a credit card, and only ever makes minimum payments, he represents a perceived risk to the lender. In years gone by, this wasn't a problem because 'revolvers' were the lenders' dream customers. However, we now have the credit crunch and lenders would rather not have (maxed out) revolvers.

If the borrower continues to use his credit card each month, thereby re-spending his minimum payment, then that risk is escalated to the point that the lender perceives his 'capital' to be at greater risk.

The lender's answer is to increase the revenue income from that capital investment to offset the possible loss of the capital itself through default. Because it's not possible to increase the high risk borrowers' APR's (to, say, 99% APR) then everyone pays for the defaults of others.

Surely you understand that unsecured lending is inherrently more risky than secured lending?

vbrindle

Yes, but I see where the OP is coming from.

Plenty of people have been careless (myself included), seen the light, and want to get the debt down, but when you get the likes of MBNA pushing rates up to 34.9% this becomes almost impossible. It's almost like they're pushing people into defaulting on their payments.

I know why they do it but it's a tough situation.

Any

vbrindle wrote: »

Yes, but I see where the OP is coming from.

Plenty of people have been careless (myself included), seen the light, and want to get the debt down, but when you get the likes of MBNA pushing rates up to 34.9% this becomes almost impossible. It's almost like they're pushing people into defaulting on their payments.

I know why they do it but it's a tough situation.

Good luck to you with repaying your debt.

I do feel that many people like you who have seen the light find it very tough.
However, there is many spoiled people out there who do not learn by their mistakes and always wait for miracles - so if they wait long enough something like sudden inheritance or interest rate cut combined with payrise or even all those threads we have seen in past days saying "let's clear all the debts that you have made before 2007 thanks to legal loophole" will help them out one day. And if it doesn't happen it is us who pay our taxes and bills who ends up paying for them.

lisyloo

but I'm not sure what that's got to do with any point I've made. It's very possible and often happens that companies can drop interest rates and make more profits, a lot depends on the price of money in the markets.

Hi Big al,

I agree with you that dropping rates by the same as the BOE rate does not necessarily equal the same profit. There are other factors.

However where we disagree is that I believe that with rising costs (taxes, food, fuel, energy) and a rising LIBOR I think that companies would make LESS profits not more.

I personally sympathise with people trying to get their debt down.
But in business sympathy is something found in the dictionary betweej s**t and ShP**is.
Sorry to be so blunt but I think a reality check is needed.
Companies are run for profit and that's not a dity word because these profits fund OUR pensions.

Look at it this way. At least people with debt are not seeing increases.
They may see decreases in future and their mortgage may be going down.
If your mortgage goes down, the best thing to do is to use the money to either pay off other debts or pay off the mortgage or save instead of frittering it away.
My mortgage will be going down but I will be increasing payments to reduce the term.
I hope to be completely debt free (including no mortgage) by 48.5 years of age and I'm trying to reduce that all the time.

olly300

vbrindle wrote: »

Yes, but I see where the OP is coming from.

Plenty of people have been careless (myself included), seen the light, and want to get the debt down, but when you get the likes of MBNA pushing rates up to 34.9% this becomes almost impossible. It's almost like they're pushing people into defaulting on their payments.

I know why they do it but it's a tough situation.

Depending on the mess you are in and therefore your credit rating there are different ways to sort it out.

For example if you have a good enough credit rating you simply transfer your debt to a card with a lower interest rate/take out a loan to repay the card and close the credit card account with the higher interest. Or if you can resistant temptation you lower the limit on the card to what you know you can easily pay off in a month.

Basically it's called taking personal responsibility to get out of the situation you are in.

Companies often when you pay debts off and want to close your account try everything to keep you as a customer as they realise you are not as risky profile wise as they thought.

BTW one of my credit card companies actually decrease my interest rate on that card when the BOE where putting their interest rates up simply because I started using it again and paying my bill of in full.

the_big_al

YorkshireBoy wrote: »

Let's try a different angle then.

The rate that a lender can borrow funds at (LIBOR or whatever) is not the only criterion for rate setting for credit card customers.

If a borrower maxes out a credit card, and only ever makes minimum payments, he represents a perceived risk to the lender. In years gone by, this wasn't a problem because 'revolvers' were the lenders' dream customers. However, we now have the credit crunch and lenders would rather not have (maxed out) revolvers.

If the borrower continues to use his credit card each month, thereby re-spending his minimum payment, then that risk is escalated to the point that the lender perceives his 'capital' to be at greater risk.

The lender's answer is to increase the revenue income from that capital investment to offset the possible loss of the capital itself through default. Because it's not possible to increase the high risk borrowers' APR's (to, say, 99% APR) then everyone pays for the defaults of others.

Surely you understand that unsecured lending is inherrently more risky than secured lending?

As I said before I'm quite aware of the difference between secured and unsecured lending (some might even say you can gauge it from the words).

I would guess that high risk borrowers are going to be here for a long time so using your scenario there will never be a drop in credit card standard rates. There's also a very high risk in unsecured loans so I guess you don't think they'll be coming down either, my bet is they will, I'll keep an eye on my own bank, HSBC, as they're for ever trying to get me to take one. I actually think the risk is higher in unsecured loans as at least with credit cards the lender can drop the limit if they perceive a risk but with the loans once the cash goes to the punter it's gone and as you know these can be taken out over seven years, plenty of time for people to have problems.