Credit card rates may be down, but don’t count them out.
The national average annual percentage rate on new credit card offers edged barely lower this week, according to the CreditCards.com Weekly Credit Card Rate Report, but analysts expect interest rates to rise in the not-too-distant future. Those predictions follow news of the Federal Reserve’s plans to maintain a key lending rate at historically low levels.
Since last week, however, APRs are down. Among averages in nine categories, bad credit cards were the only group to see lower APRs, while the averages in the other eight categories held steady.
|CreditCards.com’s weekly rate chart|
|Avg. APR||Last week||6 months ago|
|Methodology: The national average credit card APR is comprised of 95 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers and representing every card category listed below. (Introductory, or teaser, rates are not included in the calculation.)|
|Updated: June 25, 2009|
That decline in card rates followed a two-day Fed meeting. On Wednesday, the Fed voted unanimously to leave its federal funds rate at a range of 0 percent to 0.25 percent. In its accompanying statement, the Fed said it “will employ all available tools to promote economic recovery and to preserve price stability,” adding that it “continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
The Fed’s decision to leave its fed funds rate unchanged did not surprise analysts. Nevertheless, experts say an economic recovery will eventually prompt a reversal of current monetary policy initiatives, including taking the final step of boosting the fed funds rate. That would, in turn, lift banks’ prime rate — which is pegged to the fed funds rate — and by extension, increase the APRs for variable rate credit cards tied to prime.
When it comes to economic recovery, “we’re clearly on the right path,” says Gregory Miller, chief economist with SunTrust Bank in Atlanta. That means Fed policymakers will eventually have to consider dialing back the initiatives put in place to support an ailing economy. “End game exit strategy is on their minds,” Miller says.
Meanwhile, banks are reconsidering their credit card offers in light of new legislation. New regulations signed into law by President Obama, limit APRs increases and restrict other bank tactics that have been judged unfriendly to cardholders. Credit card issuers aren’t happy about losing profits. Therefore, with banks less able to hike APR for existing customers, some analysts caution that card offers may become less generous on the front end to make up for a lack of bank flexibility on the back end.
According to some experts, this change will lead banks to introduce more credit card fees rather that indiscriminately raising cardholders’ interest rates. “While the issuers will raise fees, I don’t think they’re going to suddenly raise everybody’s interest rates,” says Elizabeth Rowe, director of banking advisory services with Mercator Advisory Group in Maynard, Mass.
Rowe says banks could spend three to six months testing various combinations of interest rates and fees in their card offers, including trying out very high APRs with no fees, low APRs with high fees and both high APRs and high fees with reward programs. Eventually, though, Rowe says banks may realize higher fees are a better choice than higher APRs.
In explanation, Rowe gives the hypothetical scenario of a cardholder carrying a $1,500 annual balance with an interest rate of 9.95 percent. If the bank decides to raise that cardholder’s APR to 12.95 percent, the lender will only earn an additional $45 a year on that interest spread. From the bank’s viewpoint, “whether I get it from the APR or I get it from the fee, in terms of my balance sheet, it’s all the same,” says Rowe.
However, those two approaches could inspire very different emotions in the cardholder. While charging higher APRs to select borrowers can look like punishment, Rowe says the introduction of fees for all cardholders instead suggests a bank simply trying to earn money. “For a consumer, having someone punish me is very different from having the issuer rationalize his business,” she says.
Meanwhile, card issuers need to settle on a formula for “how they can generate new income, in case their portfolios get a little more rotten and their income spigots get turned off by this Fed regulation,” Rowe says. Card portfolios could certainly get worse. On Wednesday, Moody’s reported that credit card charge-offs topped 10 percent in May for the first time in the history of its index, with Moody’s predicting that charge-offs could eventually peak at around 12 percent in the second quarter of 2010. Charge-offs occur when banks give up on collecting money from delinquent cardholders. Still, Rowe isn’t too concerned about banks. “This continues to be a profitable business. Bankers can continue to make a lot of money. When charge-offs rise they just don’t make as much as they would like,” she says.
An added danger for issuers lies in turning up card costs so high that they scare off consumers altogether. “The issue isn’t just ‘I’m going to switch my credit card.’ It could be ‘I’m going to switch my bank,'” Rowe says.
Amid this ongoing bank experimentation with marketing initiatives, cardholders will need to continually revisit various card offers. “They need to re-compare everybody on the day they are going to apply, because what was interesting to you last week probably won’t be there,” Rowe says.