Monday, February 11, 2008

Banks Will Pay Less to Borrow Money While Consumers Will Pay More.

This really should not come as a surprise to anyone but sadly I'm sure that it will shock many consumers.

The cold hard truth is that when the Federal Reserve cut interest rates it did so in order to help the banking industry and their investors. The Fed's interest rate cuts will make it easier for banks to borrow money from, you've got it, other banks. This helps keep the banks solvent and their foreign investors happy.

Consumers, well, we're still on our own.

excerpt from:

What rate cuts? Use of plastic gets pricier
by David Lazarus

Borrowing money has become cheaper for banks after a series of aggressive rate cuts by the Federal Reserve. So why are many people's credit cards growing more expensive? Hundreds of thousands of Capital One and Bank of America cardholders have been notified in recent months that their interest rates are going up -- in some cases to as much as 28% -- even though they haven't been missing payments.

Cardholders are being told they can "opt out" from the higher rates by paying off their balances and taking their business elsewhere. But that's not really an option for people who may not have thousands of dollars in spare cash sitting in a drawer.

If anything, people's credit card rates should be heading south following repeated cuts in interest rates at the federal level. So far this year, the federal funds rate has been reduced by 1.25 percentage points and now stands at 3%. Further cuts are expected as the economy slides toward recession.

The Fed funds rate is an overnight lending that banks charge to each other. It influences the interest consumers pay for credit cards, home equity lines and car loans.

David Robertson, publisher of an influential credit card trade publication called the Nilson Report, said a number of factors determine rates for plastic, not least the greater risk of delinquencies these days resulting from the credit crunch.

But he said it seems clear that leading banks, having suffered billions of dollars in losses from the mortgage meltdown, are casting about for new sources of revenue.

"They need to raise rates because they can't raise fees anymore," Robertson said. "It's politically untenable."

Politics also seems to be behind a subtle shift in language that's appeared in the terms and conditions of several top card issuers. Increasingly, lawmakers have been taking a skeptical view of banks' long-standing insistence that they can raise people's rates at any time for any reason.

Citibank announced last year that it would no longer make this claim. Instead, the bank now says people's rates may rise because of "general market conditions."

Similarly, Capital One introduced language last year asserting that cardholders' rates could go up "if market conditions change."

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