Credit card interest rates jump, approach record highs

By Jeremy M. Simon

Interest rates on new credit card offers rebounded to near-record highs this week after U.S. Bank raised rates on several cards.

The national average interest rate on new credit card offers rose to 14.56 percent, according to the CreditCards.com Weekly Credit Card Rate Report. While that is below the record 14.62 percent rate seen two weeks ago , it is still the second highest rate since tracking began in 2007. The latest annual percentage rate (APR) increase came as U.S. Bank boosted APRs following the recently implemented Credit CARD Act and a number of products were added to the CreditCards.com database. 

Although the new law restricts a lender's ability to adjust APRs on current cardholders, the CARD Act doesn't limit rates on new card offers. That has encouraged banks to charge more to their newest customers.

"The banks are trying to replace the income lost through the restrictions imposed by the CARD Act. Since they can no longer increase the APR on existing accounts at any time or for any reason, they are protecting themselves moving forward by starting all new accounts at a higher rate," says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. 

U.S. Bank didn't respond to requests for comment regarding its recent rate increases, but in recent weeks, many issuers have pinned the blame for APR increases on the CARD Act. 

The advent of the CARD Act has even spurred issuers to discontinue certain cards, including some in our rate report database. The disappearance of these cards has prompted us to add others in an effort to maintain a representative sampling of card offers. Most of those we added had higher rates than those that disappeared, helping push the national average higher.  

Those higher APRs have made it more expensive for cardholders to carry a balance. For example, someone who borrowed $5,000 on a credit card today and consistently paid $150 per month at today's average interest rate would have to pay $6,446 to pay off the debt. That's $299 more than would have been required six months earlier. (Calculator: How long will it take to pay off your credit card balance?)

But even with banks raising their prices, some experts say that cardholders are better off since the implementation of the Credit CARD Act. "Offers may be slightly higher than before, but consumers can count on the price of the offer being the price of that debt," says Lauren Bowne, staff attorney at Consumers Union, a San Francisco-based consumer rights group. Unlike a pre-CARD Act era during which banks could jack up rates at will, banks must now give advance warning or cardholders must slip up -- by missing payments for 60 days, for example -- before issuers can raise rates. Still, that doesn't make life any easier for new cardholders coping with those higher APRs.

While they are currently testing to see what cardholders will accept, banks will soon need to find fresh borrowers. That search should bring rates down, Bowne predicts. "Credit card companies are going to have to compete for customers' business as they have before," she says.

Right now, however, Cunningham says lenders are concentrating on attracting consumers with high credit, though she says they risk alienating them if APRs climb too high. "If banks are only extending offers to those with good credit, won't this type of consumer demand the best rates on their cards? Consumers who can boast a high credit score, will have multiple credit card options," Cunningham says. "If they sense that the issuer isn't treating them right or playing fair, they'll simply take their business elsewhere."  

See related: Credit card reform arrives in the form of the Credit CARD Act, A guide to the Credit CARD Act of 2009, What's NOT covered by the credit card reform law, Calculator: How long will it take to pay off your credit card balance?

Published: March 10, 2010

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