If we wake up tomorrow to a world in which all credit obligations are met in accordance to terms, what kind of drop in interest rates could the credit consumer expect to realize?
I’m not sure that makes sense.
“Met according to terms”?
I meet my credit obligations according to the terms spelled out. What makes you think it’s not happening on a widespread basis?
Here is what spawned the question:
This was written by an attorney in this thread:
…so…I am asking the hypothetical question…
I don’t want to start a fight, but do realize that the original quote is poppycock. Credit card companies don’t just “remain in business.” They make profits, or they wouldn’t bother.
The word on the street is that due to defaults and fraud, credit card interest rates are adjusted by 1-1.5%.
My street is a national credit reporting agency, and the largest credit card issuer, Citibank, as well as MBNA, Chase and First USA have all echoed this to me.
The issue usually comes up when discussing Fraud. Our opinion is that as long as the industry has a built in protection against fraud losses, it won’t try to prevent it as much as it should. (All losses really…which explains 50,000 dollar limits to people who might not be able to pay it)
The built in protection is a flexible interest rate they set and can set because they are HQ’d in states like Delaware and S Dakota that allow it. The interest rate goes up/down by as much as 1 point, even 1.5, based on lossed they incur. They can go above 20%…and DO for higher risk folks.
1-1.5% difference is built in. If losses and fvad disappeared, that is the minimum relief all consumer would see on rates.
Creditors are in the business of making money from their investment. Rather than invent in T-Bills or other form of investments, creditors look to make profit from loaning the money at a better interest rate. Hence why several department stores charge interest in the range of 18-24% (even to their best most credit-worthy customers): there is more money in it for them.
I highly doubt that the department store charge cards would be affected by elimination of fraud and other losses. There would still be high rate credit cards sold to a gullible public that would continue to find it completely acceptable.
The OP states that all losses (including fraud) are hypothetically eliminated. Thus every consumer is on an equal playing field with every other consumer, the only difference of course being income and ability to pay. Thus there would be no more excuses where creditors tell consumers “Sorry but we need to charge you 16% instead of 9% because you are a bad credit risk”, as there wouldn’t be any bad credit risks in the OP’s world. You also put consumer debt in the same category as public debt (investment in US bonds), because the risk would be the same: none.
I would think the average consumer would do a little better than Philster’s 1% to 1.5% depending on how shrewd they were in the handling the negotiation of their interest rates. Most consumers today have average to poor credit ratings and have high rate credit cards. When you remove the possibility for the creditor to experience a loss, all consumers get excellent credit ratings and it becomes more difficult for creditors to discriminate against them as a result.