Tuesday, March 24, 2009

at what point does interest become usury?


"Although the Bank of England base rate has been reduced by nearly half - from 5% to 3% over the last few months, to try and combat the worsening economic situation, credit card interest rates have actually gone up. It’s been reported that the average credit card interest rate has risen from 17.2% to 17.6% over the same period."


  1. In a theoretical, non-rigged market, the interest rate you pay = market rate + % risk of default.

    So if credit card issuers now thought the risk of default for cardholders is 17.1%, whereas previously they thought it was 12.2%, then this would be fair enough.

    The fact that the largest pure-play credit card firm, CapitalOne, has seen profits fall 40% for the last year suggests that 'oh fuck, people aren't paying their bills' rather than 'mwahaha, let's make more profit' is indeed the motivation here.

    (and yes, obviously they should've worked out that if there was an economic downturn then people with decent incomes but no assets who lost their jobs would suddenly be fucked. But risk-blindness != usury.)

  2. So people defaulting raises interest rates, thus causing more people to default? Sounds about as sensible as any other neoclassical economic artefact.

    Thanks for the informed response, dude.


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