Interest rates soar as credit tightens in Mexico

ByABC News
November 14, 2008, 11:48 AM

MEXICO CITY -- The Wal-Mart slogan in Mexico is the same as in the USA: Always low prices. Yet that doesn't apply to the store's credit cards, which carry a 69.6% annual interest rate.

Such high rates are increasingly common in Mexico, and they are rising even further as banks worldwide tighten lending limits amid a worsening economic crisis.

Some economists are worried it could send millions of Mexicans spinning into a cycle of debt, a situation that could hurt the United States, Mexico's largest trading partner.

"There is definitely a risk because you're combining high interest rates with lower income," said Liliana Rojas-Suarez, an economist at the Center for Global Development in Washington.

Up to now, Mexico's financial system has suffered less damage than that seen by U.S. banks because of tougher lending terms imposed after Mexico's own financial crash in the 1990s.

Mexico also has a much smaller market in derivatives, which are investment instruments that amplified the U.S. credit crisis.

However, the financial burden on Mexican families is getting steadily heavier.

From January to September, average interest rates on bank credit cards in Mexico rose 10 percentage points to 41.78% more than triple the rate in the U.S. rate.

Credit has always been more expensive in Mexico than the United States, said Rafael Amiel, Latin America director at Global Insight, a consulting firm. Capital is scarcer in Mexico, and thus, banks can charge more for it, Amiel said.

Fewer banks mean less competition. And banks charge relatively high fees for services such as wire transfers and bill payments, allowing profits even though banks loan less money.

Mexicans tend to use non-bank loans, including store credit cards, far more than bank-issued credit cards, according to Mexico's Financial Services Consumer Protection Commission.

And rates are higher partly because many Mexican customers are high-risk, first-time borrowers.

"I believe banks are covering a little bit for a higher risk than that in the U.S.," said Bernardo Garza, credit marketing manager for GE Money Mexico, part of General Electric.