Is Getting Rid of “Floors” on Credit Card Interest Rates Actually Bad for Consumers?
Oddly, Felix Salmon and I find ourselves on different sides of a debate over credit card rates–and he is taking the side of the banks. Felix is worried about an impending rule against putting “floors” on credit card interest rates: Sounds great, right? Surely if there’s no minimum interest rate, that’s got to be good for consumers? Actually, no: there’s a problem here, due to the fact that interest rates are very low right now. Let’s say that I’m a customer-owned credit union, and I want to issue my customers a card carrying a low interest rate of 9.9%. I also want to protect myself in case rates rise a lot, so I put in language saying that the interest rate always has to be at least 3.9 percentage points over the Prime rate. Prime is currently just 3.25%, but if Ben Bernanke were to raise the Fed funds rate past 3%, then the rate on the credit card would begin to rise. As of February 22, that kind of product will be illegal. The variable-interest bit (Prime + 3.9%) is fine. But if yo
