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People misinterpret this as some sort of tragedy of the commons, but I think that's begging the question. We (anyone/anywhere) could pass a law that said no mo

People misinterpret this as some sort of tragedy of the commons, but I think that's begging the question. We (anyone/anywhere) could pass a law that said no more fees, and the credit card companies could instantly raise interest rates and end grace periods to compensate exactly. And then instead of cash back, they would have cards with much lower rates. I don't see that anybody would be better or worse off, to first order. The difference is framing, and psychological response. People look at stuff totally differently when it's divided into different buckets.

ghaff 5y ago
Not sure I understand that. I don’t really care about the interest rates under the current regime but of course I would care about lack of grace periods, cash back, and other card benefits.
Dylan16807 5y ago
> the credit card companies could instantly raise interest rates and end grace periods to compensate exactly I don't think you can simplify it that much. If you end grace periods, the people that currently don't pay interest will suddenly be charged huge amounts. If you drastically lower the interest rates to make their costs match the old model, then other people that pay the card off slower will suddenly be paying much less than before. It's easy enough to ban fees charged to the business, and force them to be charged to the customer, to make pricing more transparent and remove the silliness around rewards. But trying to replace fees with interest rates doesn't work, unless you set up some crazy nonlinear '''interest rate''' calculation.
- ghaff 5y ago
  Yes. Grace periods are basically the only way credit cards work for business users among others. Four and five figure balances—paid off on time at the end of the month—are how a lot of people routinely use credit cards.
  - deleted 5y ago
    [deleted]
- perl4ever 5y ago
  > the people that currently don't pay interest will suddenly be charged huge amounts They will be charged the same amount if the interest rates are set accordingly, it will just be explicit. >other people that pay the card off slower will suddenly be paying much less than before You say that as if their rate must remain, if not fixed, in a fixed ratio with others. I don't see why. >trying to replace fees with interest rates doesn't work You might be right. But I don't see why, and I think that if I can guess a little, people in the industry know much more and are smarter.
  - Dylan16807 5y ago
    Just as a nice round example number, let's say someone is effectively paying a 1% fee at time of purchase. How do you turn that into an interest rate? Stuff at the start of the month and stuff at the end of the month are going to pay interest for different lengths of time. What if they change the timing of purchases? Let's say you pick an average you're satisfied with. Okay, now you've calculated a rate you need to charge for the first month to match the old fee. You have to charge this specific percentage for the first month to make the math work out. ...but what if that percentage doesn't match the percentage you used to charge after the grace period? One way to resolve this is to charge a first-month interest rate and a subsequent-months interest rate. But that's not really an "interest rate" anymore, is it? You're just obfuscating the fee, and the goal of this exercise was to make things more transparent. The other way to resolve this is to have the "interest rate" change every single month, based on the timings of when you did all your purchases. This is just taking the old system and hiding it inside a black box, and that black box spits out an "interest rate" each month. Unless I'm grossly missing something, there's no way to use just an interest rate to emulate a system of upfront fee plus interest rate. Do you have a suggestion of how to make the math work? Tell me what interest rate could replace "2% fee, 1 billing cycle grace period, 16% interest afterwards". Also tell me what interest rate could replace "0.5% fee, 1 billing cycle grace period, 16% interest afterwards".
    - perl4ever 5y ago
      >that's not really an "interest rate" anymore, is it? If a grace period is ok now, why would it not be ok? But if there has to be one rate per customer, sure, fine, why can't it be adjusted based on their minimum balance over time? >Tell me what interest rate could replace "2% fee, 1 billing cycle grace period, 16% interest afterwards" Option 1 would be to add (for the sake of an example) 24%, keep a sort of grace period, classify people in two groups. People who were eligible for 2% cash back now pay 0% during the grace period, 16% after. People who were not eligible for cash back now pay 24% during the grace period, 40% after. Not exact numbers, just an outline. Option 2, if they want to get rid of grace periods, they just separate people who usually pay off their balance monthly and those who usually don't and charge them the different rates.

ghaff 5y ago

Not sure I understand that. I don’t really care about the interest rates under the current regime but of course I would care about lack of grace periods, cash back, and other card benefits.

Dylan16807 5y ago

> the credit card companies could instantly raise interest rates and end grace periods to compensate exactly I don't think you can simplify it that much. If you end grace periods, the people that currently don't pay interest will suddenly be charged huge amounts. If you drastically lower the interest rates to make their costs match the old model, then other people that pay the card off slower will suddenly be paying much less than before. It's easy enough to ban fees charged to the business, and force them to be charged to the customer, to make pricing more transparent and remove the silliness around rewards. But trying to replace fees with interest rates doesn't work, unless you set up some crazy nonlinear '''interest rate''' calculation.

ghaff 5y ago
Yes. Grace periods are basically the only way credit cards work for business users among others. Four and five figure balances—paid off on time at the end of the month—are how a lot of people routinely use credit cards.
- deleted 5y ago
  [deleted]
perl4ever 5y ago
> the people that currently don't pay interest will suddenly be charged huge amounts They will be charged the same amount if the interest rates are set accordingly, it will just be explicit. >other people that pay the card off slower will suddenly be paying much less than before You say that as if their rate must remain, if not fixed, in a fixed ratio with others. I don't see why. >trying to replace fees with interest rates doesn't work You might be right. But I don't see why, and I think that if I can guess a little, people in the industry know much more and are smarter.
- Dylan16807 5y ago
  Just as a nice round example number, let's say someone is effectively paying a 1% fee at time of purchase. How do you turn that into an interest rate? Stuff at the start of the month and stuff at the end of the month are going to pay interest for different lengths of time. What if they change the timing of purchases? Let's say you pick an average you're satisfied with. Okay, now you've calculated a rate you need to charge for the first month to match the old fee. You have to charge this specific percentage for the first month to make the math work out. ...but what if that percentage doesn't match the percentage you used to charge after the grace period? One way to resolve this is to charge a first-month interest rate and a subsequent-months interest rate. But that's not really an "interest rate" anymore, is it? You're just obfuscating the fee, and the goal of this exercise was to make things more transparent. The other way to resolve this is to have the "interest rate" change every single month, based on the timings of when you did all your purchases. This is just taking the old system and hiding it inside a black box, and that black box spits out an "interest rate" each month. Unless I'm grossly missing something, there's no way to use just an interest rate to emulate a system of upfront fee plus interest rate. Do you have a suggestion of how to make the math work? Tell me what interest rate could replace "2% fee, 1 billing cycle grace period, 16% interest afterwards". Also tell me what interest rate could replace "0.5% fee, 1 billing cycle grace period, 16% interest afterwards".
  - perl4ever 5y ago
    >that's not really an "interest rate" anymore, is it? If a grace period is ok now, why would it not be ok? But if there has to be one rate per customer, sure, fine, why can't it be adjusted based on their minimum balance over time? >Tell me what interest rate could replace "2% fee, 1 billing cycle grace period, 16% interest afterwards" Option 1 would be to add (for the sake of an example) 24%, keep a sort of grace period, classify people in two groups. People who were eligible for 2% cash back now pay 0% during the grace period, 16% after. People who were not eligible for cash back now pay 24% during the grace period, 40% after. Not exact numbers, just an outline. Option 2, if they want to get rid of grace periods, they just separate people who usually pay off their balance monthly and those who usually don't and charge them the different rates.