Hard to See This Coming

In an effort to curb banks from “predatory lending” and “profit taking”, Washington lawmakers enacted legislation that our Dear Beloved Leader signed into law.  Basically the new law makes it harder for banks to raise rates it charges folks who fail to make payments.

First, I often find it hilarious when groups of people chastise banks or lenders for trying to make money for “selling money” or lending money to people.  Especially when these people fail to pay that money back.  Fail to pay it back either “on time” or “at all”.  As if these lending institutions exist for the sole purpose of handing out discretionary money.  At times likes these, I always ALWAYS trot out my favorite “put your money where your mouth is” argument.  { by the way, didja catch that pun?!?  money where your mouth is? }.  If someone you know, or even if it’s you in this situation, think that people, banks or institutions should lend money without regard to being paid back, go to prosper.com and lend your own money to people who can’t afford to pay it back.  This is the perfect opportunity.  You don’t have to be a fancy shmancy bank with billions of dollars.  Even a couple hundred bucks would be appreciated.

Okay, back to the point.  When banks are restricted in their ability to sell their product to a group of people, they will react by:

  1. Stop selling that product
  2. Charging the non-regulated customers more for the same product
  3. Like the force of water, work around the obstacle

In this case, the banks choose option #3:

(AP) It’s no mistake. This credit card’s interest rate is 79.9 percent.

Typically, the First Premier card comes with a minimum of $256 in fees in the first year for a credit line of $250. Starting in February, however, a new law will cap such fees at 25 percent of a card’s credit line.

In a recent mailing for a preapproved card, First Premier lowers fees to just that limit – $75 in the first year for a credit line of $300. But the new law doesn’t set a cap on interest rates. Hence the 79.9 APR, up from the previous 9.9 percent.

The new law restricts the fees for selling money.  So, in response, the banks just raise the rate of interest.  Awesome.

But even with these new rates, does a credit card appeal to certain people?

As harsh as First Premier’s terms seem, that could be a blow to those who rely on the card, said Odysseas Papadimitriou, CEO of CardHub.com.

“Even when the cost of credit is astronomical, for people in true emergencies, it’s much better than not having access to credit,” said Papadimitriou.

Sure.  In fact, for some people, even at these rates, the borrowed money passes the marginal value threshold.  Then again, so did the flat rates the government restricted.

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