After weeks of increases, credit card APRs finally stand still
By Jeremy M. Simon | Published: July 23, 2009
Credit card rates' steady upward climb took a pause this week.
|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 above. (Introductory, or teaser, rates are not included in the calculation.)|
Ending a streak of three consecutive weekly annual percentage rate increases, the national average APR on new credit card offers held steady this week, according to the CreditCards.com Weekly Credit Card Rate Report. However, analysts say APRs are likely to soon resume their advance.
Rising card rates are "going to continue to be the trend for a while," says David Wyss, chief economist with Standard and Poor's in New York.
That's because higher rates act as a defense mechanism for banks working to guard themselves against losses in a tough economy. "They do that by making it somewhat more expensive upfront, especially for people with more marginal credit," Wyss says.
Wyss cites another reason for the APRs increases: the new credit card laws set to take effect next year. For banks, boosting rates now is "also related to the fact that they can't increase the APRs when people get into trouble" in the future, he says. Wyss notes that with the credit card laws, banks will find it harder to increase APRs on customers that don't pay their bills.
Under existing rules, banks can raise interest rates on existing customers who neglect to make payments to other lenders -- a practice known as universal default. "Except the universal default rules don't work under the new regulations," Wyss says. He notes that banks will lose an important defense mechanism, since the new rules dictate that they can't raise rates for a cardholder that defaults on other issuers' cards.
In general, Wyss says those defaults are a strong predictor for banks that could themselves lose money on that cardholder. "Chances are, if you default on one card, you're going to default on the next card," he says. Wyss adds that most defaults are due to the cardholders' own failure to pay their bill, rather than incorrect charges by the bank or merchant errors (such as double billing or unauthorized charges) that can hurt borrowers' ability to repay debt.
Fixed to variable
At the same time, credit card APRs aren't just rising -- they are also changing type.
Major U.S. card issuers Bank of America and JP Morgan Chase recently began switching some of their cardholders' accounts from fixed to variable rates. That's another purposeful move by banks. Under the new law, fixed rates would be required to remain fixed for at least one year unless cardholders don't pay their bills. However, issuers of variable rate cards would be able pass along to consumers any increase as the Federal Reserve boosts interest rates.
Currently, the Fed's key lending rate -- used to set banks' prime lending rates, on which variable APRs are based -- remains close to zero. As the economy recovers, banks know this situation can't last, says Wyss, and are switching to variable rates so that "they aren't left with low rate cards" as the Fed starts to raise rates.
For the time being, however, the federal funds rate appears likely to remain steady. In testimony before Congress on Tuesday, Fed chief Ben Bernanke reiterated that economic conditions mean the Fed's key lending rate will remain "at exceptionally low levels for an extended period."
Less generous banks
Banks are becoming less generous overall, Wyss says, due to legal restrictions on lenders' efforts to easily adjust credit limits and interest rates for existing cardholders."Therefore, you have to be tighter in giving credit initially," he says.
In this risky environment, consumers who default on one card may simply begin using one of the many others in their wallets. That leaves banks in a tough position. "They have to be sure people don't borrow more than they can pay back, and that is difficult when people have six or seven cards outstanding," Wyss says.
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