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Credit card rates steady as banks struggle with uncertain economy

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Amid mixed economic signals, banks kept annual percentage rates on their credit card products unchanged this week, leaving the national average APR on new credit card offers steady at 12.28 percent, according to the CreditCards.com Weekly Credit Card Rate Report.

CreditCards.com's weekly rate chart
  Avg. APR Last week 6 months ago
National average 12.28% 12.28% 12.14%
Balance transfer  10.32% 10.32% 11.18%
Business 10.49% 10.49% 16.74%
Low interest 11.52% 11.52% 11.83%
Cash back 11.69% 11.69% 13.22%
Rewards 12.16% 12.16% 11.56%
Instant approval 13.32% 13.32% 11.29%
Airline 13.79% 13.79% 13.02%
Bad credit 14.29% 14.29% 12.77%
Student 14.45% 14.45% 14.57%
Methodology: The national average credit card APR is comprised of 95 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers and representing every card category listed above. (Introductory, or teaser, rates are not included in the calculation.)
Source: CreditCards.com
Updated: Sept. 17, 2009

Despite a pause this week, banks have demonstrated recent willingness to experiment with changes to the terms and conditions for their card products. Analysts say that the economy isn't solely to blame.

"There's definitely repricing going on across the board," increasing rates and fees, says Michael Kon, a senior analyst with global investment research firm Morningstar. "The primary reason is the [Credit] CARD Act." In February, that legislation will introduce restrictions on APR hikes, making it tougher for banks to increase interest rates. "Starting from next year, their ability to use risk-based pricing will be limited," Kon says of banks.

Other experts say that while banks may blame the economy for making cardholders pay higher APRs and fees, the real reason, is simple: greed.

"I think the banks are saying they're raising all these fees in anticipation of future losses," says Elizabeth Rowe, director of banking advisory services with Mercator Advisory Group in Maynard, Mass. However, according to Rowe, that's really just an excuse to charge more in the present.

"What's to come for banks is 'x.' Banks are preparing as if it's 10x," Rowe says.

Instead, Rowe believes that most of banks' losses have already happened. "People who have lost their jobs have already defaulted on their credit cards," Rowe says, predicting that while unemployment may increase somewhat in the near term, it will soon level off. 

Economic scapegoat
As long as economic data continue to offer hints of gloom, however, banks will have a convenient scapegoat.

On Tuesday, retail sales data showed an increase in August, climbing a seasonally adjusted 2.7 percent, as auto sales were lifted by the government's Cash for Clunkers automobile incentive program. Excluding both auto sales and the impact of higher gas prices, retail sales increased 0.6 percent last month. Alongside such seemingly upbeat news, Federal Reserve Chairman Ben Bernanke stated that the recession was "very likely over." Nevertheless, tempering any enthusiasm his words may have generated, Bernanke added that the economic rebound is unlikely to produce many jobs.

Unemployment has threatened borrowers' ability to make payments, with credit card issuers reporting they continued to deal with delinquent cardholders last month.In August, Bank of America and Citi said cardholders defaulted on their debts at the highest rates since the recession began.

Going forward, analysts see default rates as less of a threat to lenders. According to Kon, more rigorous standards for banks' new card offers  -- underwritten in an environment of higher unemployment -- mean banks are better prepared for economic challenges than they once were. "The new balances they've put on their books are much more profitable than their old ones," Kon says.

Meanwhile, Rowe likens lenders to the proverbial fox guarding the hen house."The banks are trying to make as much money as they can before the federal regulators step in," Rowe says. "And when you call them on it, they say, 'Hey, we're a bank.'"

Fee change
Much of lenders' income in the future will come from fees rather than interest payments, Rowe says. "I think you're going to see a lot of wolves in sheep's clothing on the part of issuers," she says, explaining that as APRs remain in check, that banks will boost profits behind the guise of less-apparent fees. 

That will offer a new challenge to banks -- proving that higher fees are fair and are simply in place to offset costs faced by the lender or to discourage cardholders from paying late and other transgressions. "Nobody wants to run afoul of regulators, but everybody wants to maximize profits," Rowe says.

That means banks will make whatever adjustments are necessary to continue hitting profit targets. Credit cards "have been the big engine of bank profitability for the past 30 years, and no one is going to give up that particular engine," Rowe says. 

See related: Obama signs credit card reforms into law

Published: September 17, 2009


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