The Market Ticker
Commentary on the Capitol Markets
The obvious message in this letter is simple: Those who are responsible and can pay their bills will be subsidizing those who cannot - that is, you, the responsible cardholder, will pay the deadbeat's bill!
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If the previous interest rate on those cards was around 20% and is now 29%, the average family with a balance (about 44% of all households) was paying $3,600 in interest charges previously, but now will be paying $5,220, and increase of $1,620 a year or $135.00 a month.
There are approximately 116 million households in the US. As a consequence the decrease in disposable personal income attributable to this sort of interest rate change is approximately $113 billion, or a bit under 1% of GDP.
And that's only the direct cost of the interest. What cannot be measured is the impact on consumer spending that comes from changes in consumer behavior - that is, this is only the interest component of the change in rate.
If this interest rate change prompts people to pay down just 25% of their credit card debt over two year's time the impact on GDP simply from paying down the debt as opposed to holding it level will raise the impact to approximately 1.9% of GDP, or about $270 billion annually in foregone consumer spending.
Good luck with your "recovery" thesis folks.
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