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Why Are Credit Card Companies Raising Rates on Good Borrowers?

red AmEx; via Flickr

Question: My wife’s credit card has been paid off in full, every month, for at least 10 years running (since we have been married). In fact, there usually is a 2-3 dollar “credit” balance every month. (I always round up to keep the payment even; for example, instead of paying $20.37, I would pay $21.00.)

But we just received a letter from her credit card company raising the interest rate and limiting the credit limit. I know there are problems with credit cards in this current economic situation, but, to come after us? Your thoughts…

Paul Solman: Two parts to this question: 1) Raised rates; 2) Lower credit limit. But they’re both part of the same phenomenon.

The price of consumer credit has been rising for everyone, not just those of us who keep up on our payments. Even you and your wife are presumably more vulnerable than before, at least statistically: to losing your jobs, perhaps, or your home, which could plummet in value. In short, there’s more perceived risk in the economy than there has been in years.

Imagine that YOU are the lender. Mighn’t you want some added compensation for making a loan at this point? Just to protect yourself, if the borrowers, through no fault of their own, can’t repay you? The NYT’s story today on credit card companies looking to their best customers for profits, since Congress is looking to limit penalties on riskier borrowers, shows that what’s happening to you is something that is probably happening, or will soon happen, to many borrowers with sterling credit.

See if you can find a cheaper credit company. If you can’t, it suggests the pervasiveness of the rise in the price of risk, even for folks like you who round UP.

Same logic applies to credit limits. The riskier the world, the more creditors tighten up.

Look, if they can get away with it, won’t all companies charge as much as they can for their products? The social benefit of competition is to drive down prices as close as possible to the cost of doing business. If a rival cuts his price, you must compete to stay in business. But in a world where risk is perceived to be high and lenders are afraid to extend credit, companies in the lending business are under no pressure to lower prices. Quite the opposite, it would seem.

And for a longer discussion of how canceling credit cards affect credit scores, see my Pocket Change conversation with finance professor Zvi Bodie at the NewsHour’s new financial literacy site, Making Sen$e.