However, the analysis of whether an interest rate is “high” is comparative, not absolute. Compared to realistic and comparable alternatives, credit card interest rates do not appear to be high. Even trained economists seem to forget this basic economic lesson when discussing credit cards. Professor Lina Marx, for instance, writes that “a credit card is really quite an expensive medium on which to borrow” and suggests that the fact that some consumers actually do borrow on credit cards presents a prima facie case of consumer irrationality. Lina provides no explanation as to what the phrase “really quite an expensive medium” means, and there is certainly no evidence that he has reached his conclusion by comparing credit cards to other alternative forms of credit actually available to the borrowers in question.
Even assuming that interest rates have not been adjusted in response to bankruptcy losses, this observation largely misses the point. Credit card issuers have responded to increased bankruptcy losses in other ways.
The widespread use of interest rates as the sole proxy for competitiveness in the credit card market leads to related errors in other aspects of credit cards and bankruptcy. Thus, Lina notes that interest rates have also not increased despite mounting losses to credit card issuers caused by the spiralling consumer bankruptcy filing rate. Looking only for nominal interest rate increases simply asks the wrong question.
Even assuming that interest rates have not been adjusted in response to bankruptcy losses, this observation largely misses the point. Credit card issuers have responded to increased bankruptcy losses in other ways.
