alt Hacker NewsI wonder if there's a death spiral there:
1. Economy gets worse and some people are no longer able to keep up with their credit card payments. They default.
2. Credit cards increase rates to compensate for the increased risk since a greater fraction of their users are failing to pay.
3. People who are financially stable and literate see the increased rates and put fewer things on credit.
4. The remaining pool of people using credit now has an even greater fraction of people who aren't financially solid.
5. Go to 1.
Replies
This is a good theory.
If anyone is wondering how to escape this cycle, the solution is pretty straightforward; don’t buy things you cannot afford with cash/debit.
If putting your credit card balance on autopay is scary to you, you probably shouldn’t have a credit card. Also, having a credit card doesn’t mean you can ignore the charges and settle up at the end of the month. Credit is a tool that can be abused and misused like any other tool.
Personally, I’m anti credit in general and don’t have credit cards or a credit score. But I also moved to Europe where credit is not nearly as important as when i lived in the US.
> 3. People who are financially stable and literate see the increased rates and put fewer things on credit.
Financially stable and literate people don’t pay credit card interest at all.
Credit cards are useful for fraud protection and rewards, the people that use them to finance purchases at 24% APR are wildly irresponsible or desperate.
I think the death spiral breaks at step 3. Financially stable and literate people do not pay credit card interest. They pay off the full balance every month resulting in 0 interest payments. In cases where they need credit beyond the short term float the above gives you, they have access to lower interest loans.
These people also don't make the cards much money, so loosing them wouldn't have that much of an effect anyway.