The Shoemaker's Children ...

I wrote a story about credit cards a few days ago, and in retrospect I feel like this might be one on which I buried the lead. I started with some general points about the credit card wars, but for those who are looking at the issue seriously, the real takeaway is about Advanta. Advanta seems to have been--judging from the sheer volume, as well as the consistency of the complaints about them--the clear leader in sleazy credit card rate hikes. It's now essentially defunct as a credit card issuer, and hurtling toward insolvency. The bottom line is that sudden rate hikes work just like a run on the bank: credit card customers whose payments suddenly jump stop paying their bills. Even with Advanta's 34.99% interest, the defaults pile up faster than the payments.

One of the reasons I feel like I have a pretty good sense of this is that my own financial affairs ain't what they could be (I was relieved to read Edmund Andrews' great story and find that among writers about business and economics I'm not alone--and also, frankly, that my financial problems don't hold a candle to his). I have a pretty good sense of how over-extended debtors are likely to act because I'm one of them, carrying several cards with high balances. I actually have more sympathy for the credit card issuers than you might expect. All but one of my card issuers tried to raise my rates. I accepted slightly higher rates on two cards, "opted out" on  three more (the ones with the highest balances) that wanted much more. I don't have an issue with banks raising rates on future purchases. I don't think a bank is obliged to lend me more money at the same interest forever. The opt out terms were reasonable. In fact, Citibank's were generous: I can not only pay off the old balance at the old interest, but can keep making purchases until they expire.

This works for me, and it also works for the card issuers. If, on the other hand, my rates had simply gone up with no notice ... well, it would have been just as bad for them as for me. Because the reality is that I can't afford to pay 25% on all my cards. If I could, then I would be paying them off right now. So in practice the alternative for Citi is keeping the 8% rate I have now, or "raising" the rate to 25% and very likely charging off the debt in six months. It would not only be unfair to me, but disastrous for the bank. I have the suspicion that the result of the latest round of rate hikes from card issuers that hit folks who didn't look at their statements or didn't bother to call and opt out could yield default rates much higher than they anticipate. If it wasn't for the last couple of years of banking history, I might have thought that the banks must know something I don't about predicting default rates. Now, though, I wouldn't count on that.