Brazil Attacks High Credit Card Interest Rates

by Terry X Xie 0

For years, credit card interest rates inBrazil have been among the world’s highest, surpassing 100 percenta year despite the benchmark rate of 7.5%. Some consumer advocatespoint to an even higher rate ofabout 300 percent. The extremely high interest rates reflect a lackof comprehensive consumer credit database and historic concernsabout inflation.

But the Brazilian government is growing increasing concerned aboutthe high interest rates because it can drag consumers under watertoo easily, which might result in a credit bubble bust, endangeringthe country’s economy.

Brazilian consumers have enjoyed readily available consumer creditsuch as credit cards and post-dated checks in recent years. Thecountry’s economic growth can be attributed to consumption. But nowthat the aggressive consumer credit policy might actually backfire,the government wants to take action.

In a recent interview, Brazil Finance Minister Guido Mantegadescribed credit card interest rates as “abusive”. And thegovernment is urging state-run banks to cut their rates.

Facing strong pressure from the government, some banks havestarted to cut their credit card interest rates. For example, BancoBradesco just cut the monthly interest rates on its revolvingcredit cards from 14.9% to 6.9%. Other banks are likely tofollow.

The prospect of significantly reduced interest income causesbanks’ stocks to drop on the market. Over the long term, it islikely to change the credit card business models in the industry,forcing banks to seek additional revenue sources in order tomaintain their profit growth. They might also find strongerincentive to better utilize the consumer credit informationavailable today to better manage their credit risks and reducetheir risk exposure.

In any way, this is a welcome change for Brazilianconsumers.