Shock warning: Credit card rates could rise soon
When Jamie Dimon, JP Morgan Chase chairman and CEO, wrote to shareholders on April 9, his 32-page letter contained a mixture of good and bad news. But one point stood out: a warning that consumer borrowing costs could rise sooner than most expect. Of course, economists have been warning for years that the Federal Reserve would eventually have to raise rates from their current record lows, but Dimon was talking about something different -- and possibly much more imminent.
Credit card rates up?
The bee in Dimon's bonnet was enraged by new government regulations, which flow from the international Basel Committee on Banking Supervision's latest rules, also known as Basel III. These are intended to force banks in the 27 countries that participate in Basel to retain more and higher quality capital, which should allow them to better weather future financial crises that might resemble the 2007-08 credit crunch. The problem is, the more financial institutions hold in reserves, the less they have to speculate with and lend -- and the less profit they can make.
So Dimon was warning that banks would have to make up for that profits shortfall (he'd no doubt call it a cost increase) by raising interest rates across the board. He said that even the cost of trade finance -- often lending to huge corporations that represent the smallest risk -- would "increase dramatically." As for mortgages, he forecast: "In many cases, deserving lower- and middle-income consumers may pay far more than they might have in the past for a mortgage or, worse yet, they won't be able to get one."
There seems little reason to suppose that credit card rates would be excluded from such hikes in borrowing costs, and, given that the bank Dimon heads is the No. 1 credit card issuer in America when measured by loans outstanding, it seems unwise to ignore his warnings.
When The Financial Times reported Dimon's letter, it noted that he is "famous for clashing with regulators… as well as slamming capital rules as 'un-American.'" So is his forecast of higher rates just sabre-rattling from an enthusiastic and vocal advocate of deregulation? Possibly, although you'd think that someone in his position would be wary of issuing completely empty threats for fear of crying-wolf syndrome.
But even if those rate rises don't materialize, others are due along very soon. On April 12, just a few days after reporting the Dimon letter, The Financial Times published an interview with James Bullard, president of the St. Louis Federal Reserve Bank. In it, the banker suggests that, providing unemployment and inflation have normalized by 2016, that year could see interest rates back to their long-run levels. And those are a whole lot higher than today's ultra-low ones.
The Financial Times quoted Bullard as forecasting interest rates rising from the first quarter of 2015, and reaching 4 or 4.25 percent within a couple of years or so from now. That could see up to 4 percentage points added to many consumer rates. So, for example, average credit card rates, which at the time of writing stand at 16.99 percent, according to the IndexCreditCards.com monitor, could break the 20-percent barrier sometime in 2016.
It should be noted that Bullard enjoys far-from-unanimous support for his forecast at the Fed. Indeed, the minutes for March's Federal Open Markets Committee meeting suggest most members favor a considerably more gentle rise. However, whether or not Dimon and Bullard turn out to be right (and let no one call them the Dullard predictions), some very significant rate rises seem inevitable in the next few years.
Bad news for some with credit cards
Those with fixed-rate mortgages (at least until they come to move home) and zero credit card debt have little to worry about, although they too are likely to see the cost of future borrowing rise when they finance cars, say, or sign up for home equity products.
And it's important to recognize that only future credit card debt should normally be affected by any rate rise. Federal regulator the Consumer Financial Protection Bureau confirms that card issuers must give you 45 days' notice of any rate increase, and then apply the new rate only to future purchases. The rate you pay on existing balances should stay the same, absent the legitimate imposition of a penalty rate, or the expiration of an introductory offer.
However, hikes would have a very real impact on those who rely on their credit cards for day-do-day expenses. And it's likely there are plenty of those. Estimates for average card debt per American household vary, but the Debt.org estimate of over $15,000 seems close to the consensus figure for those that have any credit cards at all. Given the large number of cardholders who always pay down their balances in full each month, many others must surely be forced to charge essentials to their plastic. And, when rates rise, they are going to be piling on higher-interest debt every month, while paying down old balances at lower rates.
People in that position usually have a very limited ability to change their situation, at least in the short term. But, if your card debt is high, and you are able to reduce it, you might want to start now.
Published 04/21/14 (Modified 05/01/14)