Sources: interest rates, balances

Generated using Rose AI

I mean, card interest rates should loosely track balances. If more people are holding a balance that means the issuer needs higher rates to maintain the same revenue. Obviously the latest increase has much more to do with interest rate increases, but the fact that these two are tightly intertwined is very unsurprising.

Im confused, why is this the case? I would assume that the card balances being higher means they can charge less interest for the same revenue. Is it not the card balances that are being charged interest?

Card balances means that the issuer is paying merchants but not getting paid back by the card holder. It also implies a higher risk of default. You don't make money on interest until you start getting paid back.

Ah, that makes sense, thanks!

Pretty sick return for most banks. They love jacking up the credit limit for the financially illiterate who keep a revolving balance so they keep paying outrageous finance charges.

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As long as you don’t spend proportionally to your credit limit increase you’re fine. Most banks have a credit limit increase program such that a good percentage of customers will start spending more on their card collecting the measly interchange and some will actually miss payments and go into debt - even more profitable.

Here comes the Bankruptcies!!!

As someone from the EU, these rates are insane

Banks aren't tricking anyone- they make it really clear in your statement what your interest rate is. These people are buying things they wouldn't otherwise be able to because they are using credit.

We live in a free society. People should be allowed to make bad decisions. And if one has any interest and an internet connection, all the information he would ever need is a few clicks away.

Yeah damn. Didn't know they go that high.

Nice way of saying people are stupid. You’re not wrong.

Assuming they were financially educated and pushing their personal finances to the edge, they’d most likely switch over to BNPL which charges a fraction of the cost for late payments.

Ever notice Credit Cards don’t require you to establish how you’re going to pay and put auto-pay on by default? Can tell you at a major US Credit Card Issuer the rate is LOW for auto-pay enrollment.

I remember my first credit card. I used it for like a $15 purchase. Once.

Then I tried to pay it, but being a little naive I typed in my routing number or account number incorrectly to pay it.

I checked the day after it should have gone through.

$35 charge because wrong account number.

$35 charge for being late.

I fixed it immediately, grumbling about that $15 purchase costing me almost $100, but accepting I was the dumbass who made the mistake.

THEN I received a nasty call from the credit card company demanding payment, to which I explained to them what happened and that I corrected the mistake and paid it off.

And then said screw it, and cut that thing up. They needed me more than I needed them.

Since then, I've had several credit cards, but they've never made a dime off me directly again.

Line of credit accounts, sure. Loans, sure.

But nope.

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Just wait till you learn about pay day loans and 700% APR interest.

They are still making a large amount of money from you in credit fees paid by the retailer and your yearly fee with almost no risk .

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I agree, and these are somewhat lowish interest rates over here. A lot of the cards start off at 19% and if you have bad credit, it's more like 25-30+% with $75-150 annual fees.

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Banks dont hate when you do this… it’s not ideal and their not maximizing revenue. But they don’t hate it, they still make interchange income when you use the card.

I've stopped feeling sorry for people who get in debt over their heads, except student loans and medical debt.

The reason houses and cars are so expensive is because people are willing to borrow immense amounts beyond their means to have huge/luxurious instead of basic. Covenants ensure nobody builds a small house they can afford in that neighborhood. So a lot of people get locked into renting forever, and cars get more complicated and expensive every year.

Credit analyst for a bank.

You’re wrong. We don’t like increasing interest rates and it usually doesn’t have a large effect on net earnings. Although we collect more interest our default rate climbs and it usually wipes out any gains we make. In fact, a rising rate environment can lead to increased bank consolidation because banks with poor management and underwriting standards have their default rates climb faster than interest payments can cover. This leads to a bigger bank buying them out or worst of all the FDIC shutting them down and auctioning them off to another bank.

Furthermore, what you call “financially illiterate” are often people dealt a bad hand or in a really hard place (minorities especially). What do you want us to do? Return to a system that basically red lines entire groups of people because they’re struggling? Lines of credit are extremely important for not only businesses but giving people some flexibility. There are absolutely people that can’t handle their debt and that’s exactly why banks have credit departments monitoring underwriting and making sure the bank is in compliance with the FDIC or other regulatory agencies.

You’re actually the best kind of customer for a bank. Chase makes half of their credit card income (1.4 billion last I checked?) from transaction fees when you swipe your card. You’re basically a risk free money maker.

“Banks hate when people do this”

citation needed

There is no benefit to society for allowing people to carry a balance on credit cards, it's entirely a scam.

BINGO. Banks love when they can make money off you with no risk.

Lot of kool-aid there. How does your Bank’s Credit Card make money? Just curious.

The bank offers several different lines of credit. The most common ones are HELOCs, and business LOCs. We offer credit cards but obviously we use Mastercard or Visa for our consumer credit card providers. We make money from credit card transactions. When you swipe a card the business gets charged for a swipe and we get a certain % of that. We obviously make money from interest.

Most medium sized regional banks like mine (total loan portfolio of $1 billion - $5 billion) make 75% of their income from businesses. Consumer loans just aren’t a money maker for us. Credit card debt is less than 1% of our portfolio, auto loans are around 2%.

Assuming you mean a 1% Charge-off rate. Interchange is peanuts compared to what most banks make in fees/interest. I’ve worked at one of the largest Super Regional bank and a global bank spinning up card programs in Europe and North America and can tell you without a doubt the most profitable program is raising credit limits to increase outstanding balances.

I sign up for a new card, earn the SUB, and quit using it. I move on to the next new card.

Can you feel sorry for people who want to buy houses and cars they can afford but can't find any?

That likely affects your credit rating and rates you will get offered in the future. Even if you stop using the card it is still an active account and will be a part of your credit.

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No, consumer loans that aren’t classified as real estate are less than 5% of our total loan portfolio. It’s extremely rare we have to charge off a consumer loan.

Come on man, if you actually worked at a bank of that size then there’s no way you would say interchange is “peanuts.” Chase made 20 billion from interchange and 51 billion in credit card interest in 2019. Calling that peanuts is insane.

Laughs in UK English.

30+% credit cards are advertised everywhere.

Currently holding a 22.5%, an 18% and just closed a 26% I think. (I pay no interest on any of them, they are held purely for delaying payment to spread cost of large items or for deals where I profit).

A quick Google on a private window (so these are the rates they are ENTICING people with):

John Lewis 21.9% APR

Capital One 34.9% APR

HSBC: 23.9% APR and another of 29.9% APR

Barclaycard: 22.9%

Barclays: 33.9% ("Credit building".... such a scam) and 75.0% ("Rewards").

Also, that one day that you desperately need an emergency $10,000 and you can't get it out of savings quickly, or when you lose your job and your savings are depleted but you need to eat... you'll stick it on that credit card that you have with a huge credit limit.

The banks don't care about people like this guy. They don't hate him, he costs them absolutely nothing whatsoever. All he's doing is promoting continued use of credit cards, paying them money (whether he realises it or not) for a sliver of plastic and tiny, tiny, tiny portion of their computing power, and putting himself in a position where he could accidentally or deliberately turn into a "normal" customer for them at any moment.

> That likely affects your credit rating and rates you will get offered in the future. Even if you stop using the card it is still an active account and will be a part of your credit.

It's not clear if you mean it will affect my credit rating in a positive or negative way, but I'm doing alright in that regard. My FICO hangs around 800. My average age of accounts is 5y 11m. My oldest account is 25y 10m. I have zero issues opening new credit cards, except I have to watch the velocity with Chase because of their 5/24 rule.

I've been opening new cards regularly for at least a decade, but much more often in the last several years.

>The reason houses and cars are so expensive is because people are willing to borrow immense amounts beyond their means to have huge/luxurious instead of basic

I think you haven't seen the basic housing costs of something very, very, very far from luxurious.

People want to enjoy their lives, not spend them in a cardboard box, a tiny single room, a single town, or even in a roomshare with others.

If you want to own a home, you need to get into debt. The biggest debt that you'll ever have, and a debt that virtually everyone in any developed country has had. It's that simple.

Cars... it's nothing to do with that. A cheap car is a cheap car and that's great if you're prepared to maintain it yourself, pay for continued maintenance, risk not being able to get to work, etc. etc. I spent my life with £200 cars. It's okay, you can get along, but it's a life full of shock expenses, having to cancel work occasionally (fortunately I had very understanding clients/employers), hassle, stress and trying to rapidly buy a replacement once something goes wrong.

I bought myself my first ever brand-new basic model car in my 40's. Yes, it was damn expensive. It was a pure luxury, that I expected not to ever have it pay back in value. But I haven't had to worry about tests, safety, extraneous costs, etc. for the last 7 years of owning it. It starts first time, every time, guaranteed. I don't have to worry about bits falling off or whether it's going to fail each year. I have had precisely ONE BULB blow on it, in terms of potential test failures. In those 7 years, I've spent less on my car than I have on cars previously. Hell, one car I owned ended up costing me more in oil than it had cost to buy!

And that's the most expensive way I could have bought a car, but it still ended up working out. When you're paying several thousand for a small second-hand hatchback, just enough to get to work, yes, some people are going to need a loan, finance, etc. to do that. That's MONTHS of earnings just to operate the basics and in many parts of the world, even in many parts of highly developed countries, that cost would be far more trying to arrange public transport etc.

I couldn't afford a season ticket into London each year on public transport, for example. It would cost more than my car has cost me over the last 7 years to do so. Employers in London often have to give employees a season ticket loan where they pay the bulk price of the annual ticket, and the employees pays it off each month from their salary. And, no, it's not always the case that just working in London (which is a HUGE CITY, not just a tiny high-earnings area) will earn you enough to compensate for that. If anything, I'm moving and working further and further away from London as my salary increases... because I can and because it's better value to do so!

The reason houses are so expensive is because in many countries government isn't building enough of them, and there will always be a constraint on how many you can build in a given area. There will even come a crunch point where you CAN'T BUILD ANY MORE to accommodate those who might want them safely.

The reason cars are so expensive is that cars are literally allowing you to do an incredibly dangerous activity safely and they allow you to greatly increase the range of everything from your shopping to your employment to your leisure activities. I know of families who couldn't operate without a car - they wouldn't be able to get their kids to school, they certainly wouldn't be able to take them swimming or to the theatre, they wouldn't even be able to get anything more than the most basic of groceries (nope... not even delivered!), and they would be unemployed or on pathetic wages working locally.

Almost every single person I know is in "debt over their heads"... because almost all of them have a huge multi-hundred-thousand £ mortgage that literally relies on them having to go to work every single month in order for them to sustain that. And that work, more often than not, requires a working vehicle for them to get to it, or huge expense on public transport.

The two things you cite as examples are the two unavoidable expenses in almost every working person's life.

They have to spend all that interchange in rewards and partnerships to maintain their customer base. Not to mention all the operational costs in servicing, disputes, and fraud. You can’t run a credit card business successfully on just interchange and be profitable. I don’t know a single bank where interchange outweighs interest even if their entire customer base is super prime.

The truth is… credit cards have become a bet on missed payments and overspending. For every 1 customer who genuinely needed “short-term liquidity” to cover for basic needs there’s 20 to 30 customers blowing stacks on the latest influencer’s merchandise or booking an expensive trip to live like royalty.

If the bank tells you the interest rate is 20%, and then they charge you 20% interest, how is that a scam?

Is this bureau reported balances or carried balances? Keep in mind bureau reported balances are very misleading because it includes non-revolving transaction balances as well…

It’s also the role of a government to protect its citizens and this, sounds like straight up abuses.

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In the US house size has been growing for decades and houses are priced by the square foot. That's what I was referring to on growing house cost. If average people couldn't borrow enough to buy 2500+ sq ft houses they wouldn't sell, and post WWII size houses like my grandparents' would still be built today. For comparison I grew up in a 1400 sq ft house built in the 1960s and it was plenty for four people.

With cars, the gap between my parents' early sixties VW Beetle which they bought new when my father was a blue collar mill worker, is surprisingly small. Only about $2000 in 2023 dollars between that and a modern base level Kia or Hyundai. If you can believe the old ads, mileage is only about 4 mpg better today.

Before you say "yeah, but a 2023 compact is so much better!", it is, but imagine if you built a vintage car today with modern longer lasting materials and better tires and brakes and crash safety and a catalytic converter for emissions, how cheap it would be and little it would cost? As little electronics and power accessories as possible so you would get better reliability and cheaper repairs, and the mileage would still be about the same.

The data source (St. Louis Fed) states "Credit Card Balances". Aren't all credit cards revolving by definition?

sorry, i meant "carried" balances. if you ask a credit bureau, "how much is there in outstanding credit card debt" they will report back the total balances from all the metro 2 file they've received from the various issuers. The problem is that the metro 2 reporting structure doesn't consider whether the consumer is making minimum payments or paying off the balances in full, its just "current outstanding balance". Many major banks report on a weekly basis now, so even consumers who fully pay off their cards will show a "balance" on the metro 2 file. Someone who spends and pays off their $50k balance every month and someone who makes a $700 payment on their $50k balance that they've been carrying for 3 years will show the same "current outstanding balance"

Basically, between current and delinquencies there's another "hidden" step, where carried balances as a % of overall balances increases, I don't think there's a good accounting of this potential signal anywhere.