Posts Tagged ‘Bank Rate’

The Interest Rate Puzzle

August 13, 2008

The indication by the Bank of England, that Bank Rate will be unchanged tomorrow, could be good, bad or unimportant to you. Which way it should go is a matter of opinion. I believe the threat of inflation has been completely underestimated and the depth of sickness of the economy not understood.

Perhaps you need a long memory to even fear big trouble, or perhaps pessimism informs me more than facts. My underlying advice is, however, hold on to your hat; there are strong winds coming.

Because of this I think it vitally important to understand what is happening in interest rates and to make the appropriate protest—I have already written five posts on that and gathered them into a page on this blog.

But if Bank rate has not moved for some weeks why are Credit Card companies in particular pushing rates up, even for their best customers? Might it be to get customers to pay for the banks own mistakes in gambling on investments?

Just opportunism, perhaps? Or perhaps the old yachts are worn out…

But enough of my sarcasm…

What I am really concerned about is the difference between Bank Rate and the interest rate charged on credit cards. Even if we add the inflation that affects banks, ‘headline’ inflation now around four per cent, that still doesn’t make 10% and hasn’t for a long time.

Apart from the few cards that add only five or six per cent, and they do have costs and need to make some profit, the general view has seemed to be that an addon around 10% is a generous minimum. Perhaps with the odd low rate for some part of the loan or a nought per cent transfer period that can be justified. Perhaps.

But what of the card that shot its rate from around 19% to around 30%? Had headline inflation moved 10%—or the Bank Rate?

Of course not. But losses had started appearing; strains of various types. You may have noticed your card(s) taken over by a bank, or taking over another card. That has been going on for about three years, and now with increasing frenzy as one wonders how many card funders there will be in a couple of years.

Like every other finance area the rules for lending became sloppy, the assumption of ever increasing growth a mantra. And why not? Didn’t Gordon—our very own Prudence—have everything under control. [At this time there are no prizes for the answer. Hands up those who realised in 1997, when he destroyed the regulatory framework, what must happen!]

The interest rate movements are by no means limited to credit cards, and there has been movement that it would be hard to justify in many other areas. The mail order catalogues have long made me wonder. Not so many years ago most did not charge interest to customers at all.

Those that did had an incredible rate of 29.9%, and that appeared to follow the earlier consumer credit system of hire purchase. Now hardly a catalogue has not made the main company a credit company with rates of 29.9%; one charged an absolutely horrendous 39.9%.

Now I see another, that long offered 29.9%, has joined these Olympian heights with a rate of just below 40%.

And that has a great deal to do with debt experience; 29.9% is like adding one third to the bill, depending on what type of loan we are referring to. Which means more of your hard earned money goes to the company and getting out of debt and avoiding default become harder and harder.

If you are subjected to an increase in your rate which you do not think is justified please contact the company and ask for the rate to be reduced, or to explain to you in writing, with justification, what the increase represents.

You might be pleasantly surprised.

Joseph Harris
Debt Control Man

Advertisements

Immoral Interest Rates

July 30, 2008

What are interest rates? Yes, of course, they are percentage charges levied against the borrowing of money. But that is not actually what I am getting at.
My question perhaps should be: What are honest interest rates? But how to sort that one out?
Well there are one or two pointers. Take for example the position of observant Muslims. They regard the charging of interest as immoral and do not do it, just as they are instructed in The Koran. But they still lend money and some make a living from doing so.
Jews and Christians are equally warned against usury in the Old Testament of The Holy Bible. And the truly observant ones avoid lending or borrowing at interest.
Indeed that great book also has no truck with harsh loan conditions at all. Where, for example, a poor man has pledged his coat against a loan the creditor is told he must return it overnight so the poor man may be kept warm.
Clearly an attitude foreign to our western credit industry and specially to many members of the credit card fraternity.
I am raising this because yesterday the Daily Mail revealed the disgusting behaviour of a number of credit card companies in raising their rates to levels that cannot be defended http://www.dailymail.co.uk/news/article-1039110/Credit-card-rates-soar-just-time-family-holiday.html
In Biblical Terms this is usury—as the Oxford English Dictionary puts it this is the practice of lending money at exhorbitant interest. It also defines it as ‘higher interest than is allowed by law. Unfortunately it seems the law in England and Wales at least has little to say on the matter and the regulators even less.
But what figures are we talking of? Well the wholesale loans which the banks take on have interest rates which normally relate to the Bank of England Rate which is normally announced By Mervyn King, Governor of the Bank, each Thursday.
Currently it is somewhere over 5 per cent. In the interbank settlement each night the Banks and other institutions—who must balance their books—borrow from the specialist Discount Houses at rates pretty close to that level (unless there is a short term liquidity crisis). And generally, unless the financial institution is in meltdown, as Northern Rock was, they can find funds at a reasonable rate.
So, bearing in mind that the Credit card operations have to pay for staff and premises and sophisticated computer systems and so on, it is resonable for them to add a bit to the interest rate if they are not going to levy charges. So would we say an extra 5 per cent; let’s be generous and say seven.
So I judge a reasonable and maybe honest and moral interest charge at 12%—but let’s be even kinder and say 12.9%. That, by the way, is about 1% a month.
However, greed having no known limit, it seems MBNA is charging at up to the rate of nearly 36%, that is around 3 per cent a month. And about a third of card holders have had their rates raised in the past year by issuers Egg, Capital One, Lloyds TSB and Barclaycard, according to the Daily Mail. A monthly rate of 2% equals around an annual 24%. Should the rate be more than 18% [1.5% monthly]?
One little trick to pretend they are doing nothing at all is to stop showing the annual rate on the monthly statement, and just show the monthly. Since it is well known that most of us are not very numerate they are relying on our ignorance to deceive us. Dishonest I say. Especially as they most certainly do impose charges.
I also ask where are the regulators.
Well, I want you to do me a favour. Come back here and I am preparing some instructions for what you should do about it. If I can I will put the first up tomorrow. So in the meantime gather pen, paper, envelope and stamps.
Let’s start a borrowers’ revolt.

Joseph Harris
Debt Control Man