Credit card interest rates see 3rd drop in 4 weeks

By Jeremy M. Simon

Interest rates on new credit card offers fell for the third time in four weeks, according to the CreditCards.com Weekly Credit Card Rate Report, after Capital One lowered the rate on a card product.

The national average annual percentage rate (APR) fell to 14.34 percent, a level not seen since mid-June. APRs were pulled lower after Capital One cut the rate on a product, and CreditCards.com rebalanced the current offers in its database. 

Spurring the national average's decline, Capital One lowered the APR for its Venture One Rewards card from 15.9 percent to 13.9 percent. Cap One spokeswoman Pam Girardo said that while the details of its pricing strategy are proprietary, the issuer periodically considers various strategies in response to its competition and market conditions. 

According to some analysts, such moves could be part of lenders' efforts to attract the most low-risk borrowers. "You've got everyone going after the prime and super prime customer and that's causing some price competition," says Keith Davis, research analyst with Farr, Miller and Washington in Washington, D.C. That strategy isn't taking place at the low end of the credit spectrum. "No one wants the subprime customer right now," Davis says.

Interest rates were also driven lower after CreditCards.com rebalanced its database, adding some cards and taking discontinued products away, to maintain a representative sampling of online offers in the credit card marketplace.

Credit's still expensive
Although APRs have recently moved lower, rates have increased for much of this year. As a result, 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 $6,416 to pay off the debt. That's $182 more than would have been required on Jan. 1, 2010. (Calculator: How long will it take to pay off your credit card balance?)

While credit card rates are experiencing adjustment, those changes aren't coming from the Federal Reserve. On Tuesday, the Fed announced plans to leave its key lending rate unchanged. In a statement accompanying the decision, the Fed again noted that poor economic conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period." That decision means the prime rate, which is set using the fed funds rate, will also remain unchanged. And since variable rate credit cards -- which account for the bulk of plastic being used by and offered to consumers -- have APRs tied to prime, most cardholders won't see their rates suddenly change unless they commit a major borrowing mistake, such as paying a bill more than 60 days late.

Looking forward, experts say the Fed is unlikely to raise rates anytime soon. Although the recovery appeared solid not too long ago, more recent economic data suggest its health is now in doubt. "It's pretty clear things have slowed dramatically," Davis says.

That means careful borrowers shouldn't see their APRs rise. Subprime cardholders, however, may not be so lucky. "The only increase in pricing on the credit card side would be on customers that present more of a credit risk," Davis says.  

See related: Federal Reserve again leaves interest rates unchanged, 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

Updated: August 18, 2010

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