Borrowing money on a new credit card continues to become increasingly expensive, as banks work to protect themselves from a weak economy.
|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: July 16, 2009|
The latest data indicate that banks are steadily raising interest rates on plastic, with the CreditCards.com Weekly Credit Card Rate Report showing that the national average annual percentage rate on new credit card offers rose for the third straight week. Experts say that increase stems from lenders adjusting their pricing in an effort to absorb the risk of missed payments by cardholders.
As rising job losses make bill payment difficult for credit cardholders, banks are seeing record levels of delinquencies — payments made at least 30 days late. The American Bankers Association had previously reported that bank card delinquencies rose to 4.75 percent of all accounts in the first quarter, compared to 4.52 percent in the previous quarter.
Experts say that credit card APRs reflect the uncertainty by banks surrounding consumers’ ability to make payments. “I think the continued general trend in rates reflects a great deal of uncertainty in consumers to repay their credit card debt, their unsecured debt. Pricing continues to reflect that,” says Michael Rubin, author of “Beyond Paycheck to Paycheck.”
On Wednesday, minutes released from the Federal Reserve’s policy meeting in June indicated unemployment remains a challenge. Predicting a “sluggish” economic recovery, “most participants anticipated that the employment situation was likely to be downbeat for some time,” the Fed said.
That weakness in the labor market — combined with a collapse in real estate prices — means that banks have good reason to be worried, analysts say. “The creditworthiness of the individual consumer isn’t as favorable as it was before unemployment skyrocketed and the housing market plummeted,” Rubin says. Previously, consumers might have been able to run up credit card debt and then pay it off using their paycheck or borrowing against the value of their home. Not anymore.
It’s not just an uncertain economy that has banks worried. Laws set to take effect in 2010 will limit lenders’ ability to increase APRs. That could leave banks unable to alter their interest rates to offset additional weakness in their portfolio of credit cards.
As a result, two major issuers — Chase and Bank of America — have begun switching cards to variable rates from fixed rates. Fixed rate cards have APRs that theoretically don’t change. Variable rate cards, meanwhile, have APRs that track the movement of the bank’s prime rate. Banks set their prime rates using the Federal Reserve’s key lending rate, known as the federal funds rate.
For a time, variable rate cardholders experienced rate relief as the Fed cut interest rates. However, since the fed funds rate currently sits at close to zero, variable rate cardholders will eventually experience increased APRs. That’s because, as Rubin notes, at some point in the future the Fed’s next major move will be to hike interest rates. At that time, banks are set to benefit. “When prime goes up, they’ll automatically be able to charge more to the consumer without having to do very much,” says Rubin.
“Any time you take away an option from a financial service provider, they are going to look to what options are still remaining so that they can maintain the profitability of their portfolio,” Rubin says.
Nevertheless, Rubin says cardholders who pay their balances in full and on-time have little to worry about, since they won’t have to pay for revolving a balance or get hit with late fees. However, such cardholders should keep an eye on their credit limit, which banks have been trimming in a further effort to guard against delinquencies. Lowered limits could impact the cardholder’s credit score, since bringing a credit limit down means that cardholder is using a greater percentage of the credit line — known as the debt-to-limit ratio. If that ratio is too high, your credit score will suffer.
A lowered limit could also mean trouble for a borrower who is planning to make a major purchase on plastic and then quickly pay it back.
As for banks boosting rates and fees, “for the individual consumer who manages their account responsibly, almost none of this is relevant,” Rubin says.
See related: Obama signs credit card reforms into law