Money,Banking and Fanancial Marketswhich core principal (time,Risk,information,market or stability) could you use to explain why credit card issuers charge such high rates of interest?

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kplhardison's profile pic

Karen P.L. Hardison | College Teacher | eNotes Employee

Posted on

Default risk may also play a significant role in this phenomenon. Default risk measures the borrower's ability to pay obligations. Lenders offer money and credit at costs (interest rates) that correspond to default risk. In other words, the greater the risk of non-payment, or default, the higher interest rate charged. In recent decades--in a negative manipulative turn in the financial and banking industries--credit has been offered more often and more readily to lower income individuals and less stable businesses who have greater default risk. Therefore, credit is sold at correspondingly higher interest rates.

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accessteacher | High School Teacher | (Level 3) Distinguished Educator

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I do feel that there is a sense in which credit card companies exploit the ignorance of people, or at least their desire to spend now what they haven't got. The majority of people who use credit cards are blissfully unaware of the payments that are added on to the money that they borrow, and this is something that is very dangerous. The key principle therefore I would say is the market, as we have a market where people want to buy what they do not have enough money for and are willing to face ridiculous amounts of interest payments in order to achieve it.

vangoghfan's profile pic

vangoghfan | College Teacher | (Level 2) Educator Emeritus

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"Risk" would seem to be the appropriate answer here, and perhaps it in fact is. However, I'm inclined to agree with pohnpei's suggestion that "market" is also appropriate: people seem willing to pay what the companies charge. If people were unwilling to pay so much, presumably the companies would lower their charges. The fact that they do not -- and the fact that an upstart company doesn't make a massive fortune by charging lower rates and thus being more competitive -- makes me wonder if perhaps "risk" is indeed the right answer here.

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lmetcalf | High School Teacher | (Level 3) Senior Educator

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Credit card companies rely on the concept of "what the market will bear" and millions of Americans seem to be able to "bear" a very princely sum when it comes to interest rates. People with credit problems admit to sometimes not even opening the statement, and only have the minimum payment automatically sent to the card issuer each month. There is nothing more eye-opening than looking at how much something you purchase "actually" costs by the time you let that purchase sit on a card for a year or more with compounding interest doing its job on the principle charge cost.

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belarafon | High School Teacher | (Level 2) Educator Emeritus

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The sudden ability to spend beyond your means traps people into the never-ending loop of paying interest on the card without paying off the balance. It is freeing and exhilarating to swipe the card without an immediate penalty of money. With that in mind, issuers use the information they gather about spending habits to raise their interest rates, knowing that the majority of people will just keep paying them forever.

readerofbooks's profile pic

readerofbooks | College Teacher | (Level 2) Educator Emeritus

Posted on

To be real, credit card issuers try to get as much money as possible. If they could get more in the way of interest, they would. This is the way the world works. However, if you speak to them, they would say that their interest rates are based on risk (some default and the company is out money) and time, that is, they are loaning to you money for a time. Time is money.

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litteacher8 | High School Teacher | (Level 3) Distinguished Educator

Posted on

When a person gets a credit card, it is usually because he or she wants to spend more money than he or she has.  I know that you pretty much need a credit card these days to build credit, but that is still the use of them.  The companies charge high interest to hedge their bets, because at least they got something out of you if you never pay the whole thing off and declare bankruptcy on them.

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

I believe that the core principle that could best be used to explain credit card interest rates is market.  People are willing to pay the high interest rates because they do not realize how much they're spending on interest and because they really want the convenience and extra buying power of having credit.  Therefore, the companies are charging what the market will bear.

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