Credit card interest rates fall from record highs

By Jeremy M. Simon

Credit card interest rates finally fell from record highs this week, but it's far too early for borrowers to celebrate. 

The national average annual percentage rate for new credit cards pulled back to 14.77 percent, according to CreditCards.com's database of card offer information, after reaching record highs in the prior two consecutive weeks. 

This week's movement -- spurred by a rate decrease from Discover -- marked the first decline in seven weeks, but hardly represents a major shift for new borrowers.

"Having APRs at or near record highs reflects the market we are in, which is still risky," says Chet Wiermanski,  global chief scientist with credit bureau TransUnion. 

Card changes drive APR declines
The recent APR drop doesn't mean that new cardholders will necessarily qualify for lower rates. Among the latest changes by card issuers, Discover lowered the APR range for its More card from between 12.99 percent and 19.99 percent to between 11.99 percent and 19.99 percent. When reached for comment, Discover said it cannot discuss its pricing practices.

Since the national average is calculated using the bottom end of any APR ranges, Discover's change sent the average lower. Individual applicants' rates, however, depend on their credit scores, which means Discover may or may not give new cardholders that lower rate.

That isn't the only sobering news for borrowers. Although they didn't impact the national average, other card-offer changes could mean higher rates for new borrowers. Wells Fargo raised the top end of the APR ranges for both its Cash Back and Rewards cards, with each of those cards now charging an interest rate between 12.15 percent and 22.15 percent. Previously, the high end of those APR ranges stood at 21.15 percent. Again, since the high end of an APR range is not factored into our calculations, these movements didn't impact the national average.

"We took this action in order to continue offering our credit card products to the greatest number of customers possible and to keep credit flowing," says Lisa Westermann, assistance vice president of public relations for Wells Fargo. "The slight change reflects the best competitive pricing for our customers while managing risk for the company."

Risk levels falling, rate levels rising
According to some measurements, those risk levels are falling. Third-quarter data from TransUnion shows that consumers are less likely to become delinquent on their debts.

TransUnion's proprietary Credit Risk Index (CRI) declined again -- its third consecutive decrease -- indicating that U.S. borrowers are becoming less of a credit risk. "The continued decline in the Credit Risk Index is driven by fewer borrowers delinquent on one or more accounts and lower outstanding debt levels," Wiermanski said in a TransUnion press release. Credit card debt levels have been falling for more than two years, as consumers continue to repay their debt or have it written off as uncollectable. The Federal Reserve most recently said that credit card debt levels fell more than $8 billion in September, the 25th straight monthly fall.  

Still, TransUnion noted a quarterly increase in demand for credit, with the sharpest rise taking place in three states: Maryland, Massachusetts and Minnesota. As a whole, "it is evident that the fundamental improvements consumers have made toward managing their credit are in part giving lenders confidence to restore their credit marketing efforts," Wiermanski said in the release.

Generally, "if you looked in your own mailbox, you'd see more credit card offers than in the past," Wiermanski says in an interview. 

Outside research confirms that banks are hungry for new borrowers: The most recent Federal Reserve survey of bank executives showed card issuers have become more willing to approve new applicants.

But as the latest APR data shows, although banks may be lending more money, new plastic often comes at a higher price. Experts say that cautious approach by banks makes sense. Although "the consumer risks have been declining, they are still near all-time highs," Wiermanski says.

See related: Consumer credit card balances plunge more than $8 billion, Banks loosen credit card lending standards, Fed report says, Credit card reform arrives in the form of the Credit CARD Act, Calculator: How long will it take to pay off your credit card balance?, Credit card rates: interactive graphic on APR changes 

Published: November 17, 2010

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