Card rates stuck while others drop
Interest rates are down. Late payments are down. And APRs on credit cards are ... not budging.
People who carry a balance on their cards are paying average rates of 13 percent, according to the Federal Reserve, about the same as in 2008. Within that same time frame, market interest rates, as measured by the benchmark federal funds rate, have declined about 3 percentage points. In other words, banks are paying less for the money they lend out to customers.
So why aren't people who carry a balance on their credit cards getting a break?
"It might suggest there's some inertia on the part of cardholders," said David Ely, an economist and finance professor at San Diego State University.
"Inertia" is a polite way of saying cardholders are not stirring themselves to shop around. Or those who don't have perfect credit may quietly stick with the card they have, because they think it'll be impossible to get a different one.
Disclosure: this is a card comparison site, so it might seem self-serving to argue that people should shop around for cards. However, the facts support looking around for a better deal. In its 2013 report on banks' credit card profits, the Federal Reserve noted that banks have seen their own interest costs decline, without passing on the savings to card users. As the report put it, since the recession, "spreads between issuers' cost of funds and prices charged on credit cards widened substantially, and have remained at elevated levels since then."
Consider that some other consumer loans have benefited from the lower market rates. Four-year loans for new cars, for example, fell from an average of 7.27 percent in 2008 to 4.23 percent this year. The chart of Fed statistics shows the car loan rate declining, while rates charged on credit card balances stubbornly cling to their plateau.
Banks, facing lower returns on their investments and lower profits on home mortgages, are probably relying on their card operations for profits, Ely said. So they're happy to keep rates at a high level relative to their cost of funds, as long as no one complains about it too much.
Then there's the way people shop for cards. Many are ogling the rewards or cash back they'll receive, not thinking about the interest rate they'll pay. That's especially true if they assume, perhaps optimistically, they won't be carrying a balance.
"The rate is only important if you think that you will be paying interest," Ely said. Those who already know they're paying interest, because their existing balances aren't going away anytime soon, are likely surfing from one 0-percent interest balance-transfer deal to the next, rather than trying to find a low ongoing rate.
A few percentage points may not sound like a lot, but when you look at the cost of borrowing, it adds up. Adding 3 percentage points to the APR on an $8,000 credit card balance means paying an extra $240 a year. The average balance on a card that typically carries a balance is more than $8,000, according to a credit bureau analysis.
Card loans are riskier than auto loans, which are secured by property. But the high-risk argument for card rates is running out of steam. Delinquent payments, those more than 30 days overdue, have dropped to record lows for card users. They were only 2.39 percent of card balances in the fourth quarter of 2013, according to the Fed, matching the rate for all consumer short-term loans.
TransUnion, which tracks delinquencies by analyzing credit reports, also sees delinquencies improving. Toni Guitart, director of research and consulting in TransUnion's financial services unit, said it is encouraging that "delinquency levels have dropped on a year-over-year basis even though the share of nonprime consumers gaining access to card credit has increased." The remarks came in a May 14 press release about declining card debt and delinquencies.
James Johannes, a banking professor at the University of Wisconsin, said in an email interview that profits on cards are just under 5 percent of card loans, after subtracting banks' costs and losses. Of that, something around 2 percent is a "risk premium," an extra profit necessary to attract investment to risky assets like cards, "where there is no collateral and the bank eats all the losses." Economists pointed out that, although late payments are rare now, that could change quickly if the economy turns south again.
"Credit cards tend to have a history of sticky pricing," said Keith Leggett, senior economist with the American Bankers Association. The Credit CARD Act of 2009 restricted banks from raising rates, so now they're hesitant to lower rates unless pushed.
Consumers had little leverage to push for a better deal when banks were reluctant to open new card accounts after the recession, but the atmosphere is changing. According to TransUnion, card offers are up, as banks loosen their grip on new accounts. And loan officers, in a Fed survey, say they think card loans will return to historical growth rates of 6 percent a year, matching their pre-recession rate. That makes this a statistically good time to comparison shop for a better deal.See related: Script to ask for a lower credit card rate
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