If you begin foaming at mouth once a month when you receive your credit card statement, join millions of Americans that are foaming along with you. There is a growing outrage at seemingly endless journey towards eliminating balance on your credit card and that is due primarily to extravagant interest rates charged by credit card companies.
Your bank is probably touting super rates it offers on Certificates of Deposit or CDs. “Just deposit $5,000 for 6 months and we’ll give you a ‘whopping” return of 2.83%.” Yet, in contradiction to low rates banks are willing to pay you for use of their money, interest on credit card rates can be 10 times amount offered on a CD. Why?
The interest rates on savings accounts and CDs are based on competition, cost to bank of borrowing money and expected return on investment to bank for use of your money. Because a savings account is liquid, bank does not know from day to day how much of your money will be available for its use. A CD, on other hand, requires that you place your money in bank for a specific amount of time. The longer time period, higher return. That is because bank has greater flexibility with your money and knows exactly how long they have to work with it.
Credit card companies have been highly successful at convincing government regulators that they need higher interest rates to protect themselves. As opposed to a mortgage loan or home equity loan, credit card companies claim that they do not have any collateral to “secure loan” they provide to consumers that use their credit cards. If a customer defaults or files for bankruptcy, a credit card company had little recourse to recover balance due on a credit card account. But a recently passed law now makes it much harder for individuals to eliminate all of their credit card debt by filing personal bankruptcy. Many think this is an unfair advantage for highly profitable credit card companies.