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Capital One's moves send credit card interest rates falling

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Interest rates on new credit card offers fell this week, according to the CreditCards.com Weekly Credit Card Rate Report, after Capital One introduced lower rates on several of its cards.

CreditCards.com's Weekly Rate Report
  Avg. APR Last week 6 months ago
National average 14.15%
14.35%
14.62%
Low interest 11.99%
12.11% 12.23%
Cash back  12.31%
12.49%
12.61%
Balance transfer 12.68%
12.81%
12.64%
Business 12.85%
12.85%
11.32%
Student 14.05%
14.49%
14.61%
Airline
14.14%
14.37%
14.37%
Reward
14.33%
14.40%
14.42%
Instant approval 15.99%
15.99%
18.41%
Bad credit 20.64%
21.04%
25.99%
Methodology: The national average credit card APR is comprised of about 100 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: 9-1-2010

The national average annual percentage rate (APR) fell to 14.15 percent this week, reaching the lowest level since mid-May. The drop from last week's 14.35 percent was the largest since early April and followed Capital One's decision to offer lower rates on several credit cards.  

Capital One lowered the bottom end of the APR ranges on several of its cards, some by several points. For example, the Classic Platinum For Young Adults card is now offered to some applicants at 14.9 percent, while others will still be offered the previous 19.8 percent rate. The bank was unavailable for comment regarding its offer adjustments.

Issuers testing interest rates
Industry analysts said such moves are no surprise. "I suspect that what you are seeing is a test strategy for that segment of the market," says John Grund, co-manager of the card issuing practice area of First Annapolis Consulting. Card issuers often vary their offers depending on the medium -- a direct mail offer may be different from an online offer because of the target audience, for example. But, Grund says, a bank can also vary its offers online based on where or when they are viewed.

"The website of the Wall Street Journal would attract a different audience than People magazine's site, as an example," Grund says. "Issuers have to price for that risk and could very well have to offer higher APRs to do so."

Those pricing adjustments sent overall rates south. When a card offers several APRs, we factor in the lowest rate when calculating our national average. Because Capital One's just-introduced rates were lower than the cards' previous rates, they pushed the national average lower.    

Cap One isn't the only bank making changes. Discover lowered the top end of the APR ranges on four cards. Those changes, however, had no impact on the national average. Discover said that due to competitive reasons, it doesn't comment on marketing practices regarding rate changes.

Pricier than at start of year
Although rates came down this week, they've been increasing this year. For example, a typical cardholder 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 $6,390 to pay off the debt. That's $156 more than would have been required on Jan. 1, 2010 (when the national average APR was 12.97 percent). (Calculator: How long will it take to pay off your credit card balance?)

Faced with rising rates and an unstable economy, many cardholders are limiting their shopping and paying down debt. MasterCard's SpendingPulse, which tracks purchase transactions, indicated that U.S. consumers spent only slightly more this August than in the same month last year. Some of the money not spent at the mall appears to be going toward paying off credit card balances. According to Fitch Ratings' latest credit card index, defaults on U.S. credit cards hit a 15-month low in July, while cardholders continued to make fewer late payments.  

See related: Credit card lending standards keep tightening, 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: September 1, 2010


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Updated: 09-26-2016


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