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Friday, January 29th, 2016  |  USD: Buy 531.29 / Sell 543.92
20 years

Interest rates on credit cards remain as high as 54%

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January 23rd, 2014 (InsideCostaRica.com) A recent study by the Ministry of Economy, Trade, and Industry reveals that interest rates on credit cards in Costa Rica remain high, ranging between 23% and 54% – with the majority charging between 40% and 49.9%.

 

The study also reveals that Costa Rican credit card debt has increased by ¢11 billion compared to the last survey.

 

The result of these high interest rates is that many Costa Ricans end up paying three times the amount for a purchased item, according to Economic Minister, Mayi Antillon.

 

In August, President Laura Chinchilla signed a bill that would limit the maximum interest rate charged by credit card issuers and department stores.

 

The bill presented by Chinchilla’s government would establish a usury limit on these interest rates.  Under the bill, the maximum interest that could be charged would be twice that of the quarterly average charged by the National Financial System (Sistema Financiero Nacional).

 

For example, today the quarterly average rate is 17.39% in colones, which would mean under the bill the upper limit on interest rates in colones would be 34.77%.  In dollars, the average rate is currently 10.9%, meaning the upper limit for interest in dollars would be 21.8%.

 

The Consumers Association of Costa Rica has also voiced its support for the bill, which remains in the legislature.

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  • disgusted

    I was checking out TV’s downtown noticed a price for one 943,000 colons scheduled payment and down payment over the 36 months added up to 1.45 million colons. This comes out directly most paychecks at the bank before they get their money. Those who default can end up loosing their home or car whatever of value. Everything here is secured.

  • Yeims

    Rates approaching 50% are more than just high; this is usury at its finest.

  • Jerry

    98% literacy rate just went out the window for Costa Rica.

  • Ken Morris

    Yeah, if you want to understand the business bottleneck in Costa Rica, you needn’t look any further than this. The cost of money is outrageous, at least for anyone not important enough to cut their deals in the banks’ back rooms.

    And for the average consumer, forget it. I ended up getting a secured credit card (that is, secured against my own money put into a CD at the bank) simply because that was so much easier than going through the mountains of paperwork required to get an unsecured card. (I tried the unsecured card first, which required a $60 visit to an accountant to get a financial statement, only for the bank to tell me that the financial statement wasn’t acceptable because it wasn’t specifically addressed to that bank, a requirement that wasn’t mentioned before I toddled off to a CPA and spent the sixty bucks.) Then, the bank never told me the interest rate on my secured card, and when I specifically asked, I was given a long document that included a big equation showing how interest was calculated but without mentioning the actual rate! Finally, during a routine bank audit, the auditors sent me a document which showed my interest rate to be 53%. This was the first I was ever informed. And let’s face it, 53% is a wee bit high for a card 100% secured by a deposit in that bank!

    More and more, too, people just need a credit card for things like car rentals, hotel reservations, and yes emergencies. Meanwhile, the government tries to encourage credit card usage as a way of monitoring tax compliance. Yet to date the government has done zip, zilch, nada to regulate lending on behalf of consumers, and the banks have been shooting consumers like ducks in a barrel.

    Don’t get me started . . . The financial sector is the biggest impediment to economic development in CR, and no surprise, that sector shows the greatest financial growth.

    • Lav

      Some banks in the USA and Canada (I know TD is 1) issues verified by Visa debit cards. I use it all the time to book flights and hotels online. Have only had a few instance where it was not accepted.

      There is no interest rates to worry about because the money comes right out of your checking account. You do not have to worry about credit card debt, as you do not accumulate debt. You are spending your money in your bank.

      People need to step away from credit. If you can’t afford to pay for it today, you don’t need it.

      • Ken Morris

        In general I agree, but I see enough exceptions not to be able to agree completely.

        One reason I want a credit card for example is for an emergency doctor visit, medicine, or even hospital admission. Granted, since my card is secured, I could theoretically maintain a bank balance sufficient to use a debit card instead, but in the real world I’m much less likely to run up a credit card balance than I am to run down a bank balance. It helps me maintain an emergency reserve to add the extra step of a credit card secured by a CD. (Plus, the CD pays interest and I don’t actually pay the 53% interest on my credit card, since I pay off the balance in full every month, so in the end I make a little money.)

        More to the point, the discussion is mostly about unsecured credit cards, which anymore I think lots of people need for emergencies. I don’t know what the data are in Canada or Costa Rica, but in the US somewhere in the neighborhood of half the people don’t have any emergency money in reserve. To say that they should is wise counsel, but in reality they don’t and probably won’t. Worse, doctors, drug stores, and hospitals now basically assume that people will have credit cards, so they don’t offer credit to patients/customers like they used to in the pre-plastic days.

        So I don’t completely buy the “if you can’t afford to pay for it today, you don’t need it” mantra. This is to assume that people only use credit for frivolous consumer expenditures, when in fact they often use it for things like emergency medical care.

        My second reason for wanting a credit card is car rentals. I don’t rent cars a lot, but from Googling the issue I’ve learned that some car rental companies won’t accept a debit card (or cash). Unfortunately, the world has become so accommodated to credit cards that things like renting a car can be a major hassle without one.

        Third, though not for me specifically, I have read that lots of small businesses in the US were largely self-financed via the owners’ credit cards prior to the 2008 financial crisis. (I don’t know what has happened since.) Maybe again this is unwise, but it’s not uncommon for businesses to need to borrow money to smooth out rough patches, and when signature credit could be had at often less than 3% interest, credit cards were actually a useful aid to small business development. Plus, I favor small business development, especially in CR, and thus find the outrageous interest rates charged here to stifle precisely the kind of economic development that is desirable.

        In some version of an ideal world everyone would live within their means plus have a cash reserve, but the more I’ve looked at the modern world, the less I believe it works that way. In the US, college graduates often start out in debt–those nasty student loans–and we are told that it’s “good debt” because it’s an investment against future earnings. Then businesses, including banks, do the same thing. They borrow a bunch of money on the basis of a business plan, which if it works will pay off the debt plus reap a profit, but if it doesn’t work, well, there’s bankruptcy. I believe all major US airlines are now flying under bankruptcy protection, while many of the banks themselves went bankrupt in all but name.

        In short, when I look at the way financial life works for most people and most businesses today, I see credit at every turn. Although I wish it weren’t this way, I’m afraid it is, and therefore see no strong rationale for finger-wagging at regular people about living without credit. Nobody else does or expects them to, so why should they? The policy goal would seem to me to be to make sure regular people have access to credit at fair terms, as well as to try to get everyone from the governments and major banks on down to the regular people to use credit more responsibly.

        • Lav

          I had a nice long reply written out, but deleted it because we have 2 different views. However, in my line of work I see more people who use their credit cards for frivolous spending than for emergency use. A solution to that is the debit Visa card. If you are able to pay your balance at the end of the month then it really does not matter if you pay it today or at a later date. Paying today keeps you in constant thought of your finances. It saves you not only the interest payments (which the vast majority of people do not pay their balance in full), but also teaches fiscal responsibility.

          A smart person makes their money work for them. They should take the money they would have paid in interest and put it aside. Every dollar counts.

          • Ken Morris

            Sorry you deleted your longer reply, since I’m not sure we do have different views.

            Do a lot of people use credit unwisely (from the standpoint of their financial well being)? Sure! A lot of people also rack up the bank fees by taking multiple small withdraws from ATM machines.

            However, I was struck by the data on personal bankruptcies in the US showing that somewhere in the neighborhood of half of them were attributable to medical bills, not frivolous consumer spending. Granted, that’s the US, where the healthcare system was a catastrophe waiting to happen for many people, but the larger point I extrapolate is that contrary to the stereotype, lots of people get into financial jams as a result of genuine emergencies, not irresponsible spending.

            If there is a difference in our views (which I’m not sure there really is) it is that I bristle over blaming the victims. When banks charge a 50% interest rate, they justify that by the default rate. Methinks they have cause and effect exactly opposite. When you charge that kind of interest, people are going to default. Plus, I looked at the data on credit cards issued by CR banks and found that the banks make a whole lot of money off them despite a moderately high default rate. Not least, I have only met one businessperson my entire life who was actually responsible managing their own finances. Everyone else has been personally clueless. The main difference between them and those they stereotype as irresponsible is that they have enough money to pay for their irresponsibility.

            Do we differ? I dunno, maybe in our assessment of human nature. I find those on the bottom no less responsible than those on the top, only poorer.

            And I note (which you might have data on) that lots of people in CR don’t even have a bank account. Some even used to have one but closed it. I seem to recall that a fairly high percentage of people in the US (like 15%) don’t have bank accounts either. I think of this as foolish, since in my experience you can usually use banks to your advantage–even make money while you sleep–but then when I see what they go through, I’m not so sure it is foolish.

            Heck, the other day I went into one of my banks to buy some CDs and the clerk informed me that the balance in my account was negative. How could that happen? The clerk explained that an annual account fee is withdrawn automatically. Gee, I’d had that account 7 years and this was the first I heard about an annual account fee. If they even have disclosure laws in CR, which I’m not sure they have, they don’t necessarily abide by them.

            And while I’m on this roll, I started out in CR as a rentista, and each month the bank was supposed to transfer $1000 from my rentista account into my personal account. Each month it was late making the transfer, always at least a week, sometimes two weeks or longer. This kind of delay for an automatic electronic transfer between accounts in the same bank would be illegal in the US or Canada, and should be illegal in CR, since it amounts to the bank stealing interest from customers. However, it was done to me every month for 5 years.

            I’m not wild about banks in the US either, especially after my bank there was bought out by a bank I loathe and then of course various fees were raised as the bank soaked the good customers to offset the losses that arose from their own mistakes, but I have no idea why CR allows its banks to get away with the kind of shenanigans that are routine here. Unless the financial sector is seriously reformed in this country, there’s not going to be much local economic development. Foreign financing is darn near required for any kind of small business in CR, since there ain’t no local financing for the little guy, and this is definitely not a way to stimulate locally-owned business.

            I just think banks in CR operate according to the hacienda system in which a few make the bucks and everyone else is a peon.

  • Steve Stanfield

    I keep my US credit cards active and use them down here. Many cards offer no foreign transaction fees, and the interest rates are much, much cheaper than what CR banks are charging.

    • Ken Morris

      Yeah, I did this for a long time too, and it was definitely better than dealing with the credit cards in CR, but this underscores the policy problem of credit in CR. When Ticos have to pay two, three, or more times the interest rates for dollar credit than those of us from the country that prints the dollars, they are at a distinct disadvantage in the global economy.

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