Credit card interest rates hit highest level since 2007

Hikes by Target, Citi send national average skyward

By Jeremy M. Simon

The holiday from rate hikes has ended -- in a big way.

Interest rates on new credit card offers skyrocketed this week to their highest levels since October 2007, according to the CreditCards.com Weekly Credit Card Rate Report, as banks acted just ahead of legislation that will restrict their abilities to adjust card terms.

Target and Citi raised annual percentage rates (APRs) on some of their cards this week, sending the national average interest rate on new credit card offers surging to 13.16 percent. That rebound follows three straight weekly APR declines around the new year's holiday, with experts predicting that the pending Credit CARD Act  -- much of which takes effect on Feb. 22, 2010 -- will cause issuers to raise interest rates further. 

"Higher APRs are a pre-reaction to the new credit card rules," says David Wyss, Standard & Poor's chief economist. "If banks earn less money from fees, they have to make it up somewhere else, such as using higher rates."

Getting costlier to be a cardholder
Such moves by banks mean more financial pain for cardholders. For example, someone who borrowed $5,000 on a credit card today and consistently paid $150 per month at today's rate would have to pay $6,258 to pay off the debt. That's $142 more than would have been required six months earlier.

Target, which this week raised interest rates on its Visa card, says the APR changes will enable it to remain competitive with other lenders while also preparing for the new law's reforms. As of August, the first major provisions phased in, requiring issuers to give at least 45 days' advance notice of interest rate hikes on future transactions and allowing customers to opt out of the rate hike.

Among the changes coming in February:

• Interest rate hikes aren't allowed during the first year a new credit card is issued.
• Except under limited circumstances, rate hikes cannot apply retroactively to existing credit card balances.

Those changes have left banks scrambling. "This legislation will remove a variety of our risk management tools," says Target spokesman Eric Hausman, adding that Target will be limited in its ability to change card terms when signs indicate cardholders may have trouble making payments.

Wyss says that lenders may also tack on annual fees or increasingly switch cards to variable rates. Those variable APRs are usually indexed to track changes in the prime rate, itself based off the Federal Reserve's key lending rate, the federal funds rate. The law allows variable rate card rates to rise and fall automatically without triggering any consumer protection.

"Banks expect market interest rates to rise (they almost have to from here)," Wyss says in an e-mail. "Therefore, cardholders should expect higher rates and more variable rates going forward."

See related: Creative new fees escape CARD Act rules, surprise consumers, A guide to the Credit CARD Act of 2009

Published: January 13, 2010

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