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The Fed's Apparently Nonexistent Interest

By Bob Lawless

Last week, Katie proposed that we might have a blog category for "Beyond the Comfort Zone." I'll add another new category: "Things Bob Does Not Understand." It's sure to have lots of entries. Here is what I don't understand today.

As illlustrated by a Wall Street Journal article from last week, a number of media sources reported that credit card interest rates are rising. The conventional story is that credit card lenders are hiking rates to recoup income lost from new restrictions on fees and penalty rates. Even if credit card interest rates are rising, it would not necessarily mean the regulatory changes have backfired. The point was not to make credit card borrowing free, but just to make its costs more transparent. To the extent the regulatory changes have moved the costs into easily understood front-end interest rates instead of "gotcha" penalty fees at the back end, these changes have accomplished their purpose. But here is the thing, I don' t understand how the world has come to the conclusion that credit card interest rates are rising.

The Federal Reserve tracks credit card interest rates, as well as a whole host of other data such as levels of various types of consumer debt, through statistical release G.19. It reports two interest rates for credit cards. The first is an interest rate for "All Accounts," and the second is an interest rate for "Accounts Assessed Interest." Looking over the past five years, the rate for "All Accounts" has been rising, but the rate for "Accounts Assessed Interest" has stayed relatively stable. Obviously, "All Accounts" must include accounts not assessed interest, but what does it mean to have an interest rate on an account that is not assessed interest? The explanatory note for the statistical release does not provide much illumination.

Yes, I get the idea that all credit cards have an APR even if the holder is a convenience user who is not revolving the balance and hence not actually paying the APR. The rate for "All Accounts" might be misunderstood as the rate convenience users will pay if they begin to revolve, but it's not that because it includes both convenience users and revolvers. Moreover, if a convenience user starts revolving a balance, the interest rate they pay will be counted as part of the "Accounts Assessed Interest."

The only meaningful figure would seem to be the interest rate for credit card accounts actually assessed interest. That number is not rising, which seems quite important given the complaints of the credit card industry that the new regulations would lead to increased costs for consumers. If I am not understanding the Fed's numbers, I am sure one of our informed readers will explain in the comments.

Full post as published by Credit Slips on September 01, 2010 (boomark / email).