2020: Why have credit card interest rates risen so much relative to Fed Funds?

BECKY QUICK: This question comes from three investors in Israel, Lidor Zloof, Yossi Zloof, and Dan Gorfung.

They want to know about the credit card industry. It says, “How do you explain the rise in the average credit card interest rate in recent years compared to the federal funds rate? What are the forces that you think might keep it at or around current levels, and what are the forces that might drive it lower in the future?”

WARREN BUFFETT: Well, that is not a subject that I’m — you know — obviously, it affects American Express to some degree, it affects the banks we own.

But interest rates on credit cards respond to competition, obviously, to loss potential, which, obviously, has gone up significantly in the last few months — although it’s gone down, perhaps from some other periods you can pick in the past — but I don’t really have much I can bring to the party on that question.

We are not in the — well, that isn’t true. Our furniture companies, a couple of them, have their own credit card, although they do a lot of business on other people’s credit cards.

My general advice to people — I mean, you know — we have an interest in credit cards, but people — I don’t — I think people should avoid using credit cards as a piggy bank to be raided.

I had a woman come to see me here not long ago, and she’d (inaudible) some money — and not very much, but it was a lot to her — she’s a friend of mine — and she said, “What should I do with it?” And I said, “Well, what do you owe on your credit card?” And she’s, “Well, I owe X.” And I said, “Well, what you should do” — I don’t know what interest rate she was paying, but I think, you know — maybe — I think I asked her, and she knew, and something like 18 percent or something.

I said, “I don’t know how to make 18 percent.” You know, I mean — if I owed any money at 18 percent, the first thing I’d do with any money I had, would be to pay it off. It’s going to be way better than any investment idea I’ve got. And that wasn’t what you wanted to hear.

And then later on in the conversation, she talked about her daughter, and her daughter had a thousand dollars or two thousand dollars, or something. And she said, “Well, what should I do with …” — and she named the girls — ”… money?”

And I said, “Have her lend it to you.” (Laughs)

“I mean, if you’re willing to pay 18 percent —(laughter) — or whatever, I mean, she’s not going to find a better deal. I’ll lend you money.”

It just doesn’t — it doesn’t make sense. You can’t go through life, you know, borrowing money at those rates and be better off (inaudible).

So, I encourage everybody — it’s contrary to my own — or Berkshire’s interests in certain cases — but the world is in love with credit cards — but I would suggest to anybody that the first thing they do in life is not owe — I don’t think — you can get to something else later on — but don’t be paying — don’t be paying, even 12 percent, to anybody. I mean it’s —

Pay that off and then — and if they’re really a good credit and they don’t want to do it, come and see me personally, I’ll lend you the money — (laughs) — at that rate.

Greg, what do you tell your children? (Laughs)

GREG ABEL: The same advice — excellent advice. (Laughs)

No, I have three that carefully use their credit card, and more I would say for — not the — but, obviously, people use it a lot more as they go into the digital world and e-commerce world, but then the goal has to be to repay it.

It doesn’t mean you — because you have to use it for those type of transactions, you run up the balance, but there’s an incremental risk there now.

WARREN BUFFETT: It’s a matter of convenience for some people.

GREG ABEL: Yeah, yeah.

WARREN BUFFETT: But — I would have trouble — if I were paying 12 percent for money, or whatever it might be, it would not be a good thing. (Laughs)

You won’t see Berkshire paying that. (Laughter)