I forgot to talk about another MISH post that was interesting, regarding Citibank's decision to jack credit card rates to 29.99% on a number of customers. My first thought is one of adverse selection - Citi's decision would force any sane person who has the ability to pay down their balance to find another card instead of paying Citi's usurious rates. Citi would then be left with nothing but a steaming pile of customers who cannot pay their bills, and who would presumably get disenchanted with their prospects of ever being able to cover 29.99% APR's, and try to find a way to walk away from their debts to Citi.
But then I had an epiphany - what if Citi is brilliant? What if they know that they have hundreds of thousands, if not millions, of customers who will be racking up increased defaults in the next 24 months, and thus increased losses for Citibank. The solution? Raise your rates so high that the customers are FORCED to transfer their balances to another bank's credit card!
Now, in order for this to be their brilliant plan, these customers would have to have the ability to transfer their debt elsewhere. I'm sure that 2 years ago this wouldn't have been a problem - but I have no idea how hard it currently is for someone who carries $5k to $20k in revolving credit card debt, while always making on time payments of at least the minimum, to transfer a balance to another bank's card.
Anyone? Thoughts? Is this a brilliant plan by Citi to force their at-risk cardholders into some other bank's arms like a hot potato?
-KD
6 comments:
What makes you thing there has to be a brilliant plan?
Maybe stupidity has entrenched itself permanently over at citi.
oh - it's definitely possible that it's stupidity...
A friend of mine in the industry noted that they are probably trying to, at the minimum, keep their riskiest borrowers from borrowing more.
KD,
Can you comment on karl Denninger's blog today regarding dark pools and HFT (i know a favorite topic of yours)
hi Joel - i just read Karl's piece. i find it amazing that he can be against high frequency trading, and then say there's nothing wrong with stock prices reflecting the supply and demand for shares - which is probably the main strategy HFT algo's use... but the topic is dark pools: it's simple: Dennninger's example of someone selling stock for 9.90 in a dark pool when there is a $10 bid in the open market DOES NOT HAPPEN! There are rules to prevent exactly this: all trades must still be done at the inside market: the NBBO - national best bid/offer. it's that simple.
So he either does not know these rules exist or is convinced that Goldman and others are simply working around them?
Thanks,
I really enjoy the blog (both poker and financial). Nice to have voice of reason...
Btw I can say at least from my own experience, it is still exceedingly easy for me to transfer balances from one credit card to another. I must get two or three offers a month still to transfer amounts from other cards. The only difference from a few years ago is that while back then, all the offers were for 0% interest for the next two years, nowadays they tend to range from some 0% or 0.99% or 1.99% to maybe as high as 7.99%, and generally the promotional rates last for a shorter period of time as well.
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